How to Increase the Odds of Making a Profitable Trade
How lucky are you?
If you’re like most Aussies, you’ll probably like your odds in a game of chance.
You name it: pokies, scratchies, lotteries, sports betting and casinos. According to a 2010 Productivity Commission report, about 70% of us try our luck each year.
But what are your odds of winning big?
Well, as you probably know, they aren’t great.
At one in 1,716, you could try your luck at a 13-horse trifecta.
Or maybe you’d prefer a one in a million chance of turning a $4 scratch-it into $50,000.
But for the super lucky, there’s only one option: the lotteries.
Take Oz Lotto for instance. To win the ‘big one’, you need seven correct numbers out of 45. There are roughly 45 million ways to do this. Your exact odds of winning are one in 45,379,620.
Just think about that — over 45 million to one.
The odds of a division-two win are also huge. You could play every week for life and it’d still be a long shot. Merely winning the lowly division-four is a statistical rarity.
But what if you could eliminate half the balls?
Well, your chances of success would skyrocket.
Choosing from 22 balls instead of 45 makes a big difference. The odds of winning the top prize drop to one in 170,544. Imagine the edge this would give you over everyone else.
Now, I don’t have the secret to actually doing this. Winning the lottery is entirely due to chance. I’m not aware of any strategy that give could give you an advantage.
But I believe I can give you an edge in the stock market.
Picking the winning stocks from the losers
But these are the exceptions…
For every superstar, there’ll be a range of non-performers. These stocks do little more than cost you money. And if you buy too many of them, they could ruin your returns.
Have a look at this chart:
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You’ll be familiar with this graph. It shows the movement in the All Ordinaries since late 2014 (when Quant Trader began live signals). The market is near the same level it was in March 2015.
A missing element over the period has been a smooth uptrend. Instead, sharp corrections have followed the advances. This makes it harder for traders to stay on a trend.
What’s more, only a little over half the months show a gain. The historical average is for about two-thirds of months to be in positive territory.
But this doesn’t mean you can’t make money.
The trick is to separate the stocks with the most potential from those with the least.
Part of Quant Trader’s service is a weekly uncapped portfolio. This lists every ASX stock that meets the system’s entry criteria. It’s a quick way to eliminate more than half the ‘balls’, so to speak.
I had a look at the current line-up during the week. There were 375 stocks in total.
Just think about this for a moment. From more than 2,000 ASX listings, only 375 have made it through the system’s screening process. That’s less than one in five.
So how do these stocks shape up?
Well, it’s interesting…
The average winner is currently up 31.6%, while the average loser is down 8.7% (60.5% of stocks are in the black). The top 100 trades are up, on average, by 61.9%.
These stocks are from what I call the ‘inner market’ — a group of high potential companies that could give you a market beating portfolio.
So, what exactly is the inner market?
Well, let me explain…
How to make a profitable trade
I talk a lot about buying into strength (i.e. as prices are rising). The reason for this is to trade with the trend. This could increase your odds of making a profitable trade.
But that’s not all.
Strength is also an excellent screening tool. By only focusing on strong stocks, you automatically cull many of the worst performers. This could give you a big advantage.
Check this out:
You’re looking at the hypothetical performance of Quant Trader’s uncapped portfolio. It assumes $1,000 on every trade. And as always, there’s no allowance for costs and dividends.
This covers the same period as the previous chart. While the All Ordinaries is still near its March 2015 peak, the system’s profits have made a series of new highs.
Here’s the chart for the All Ordinaries again:
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Have a close look at the two graphs. You’ll see they look very different. It would be easy to think they were for completely different markets.
So why is this?
Well in a sense, they are for different markets.
You see, the All Ordinaries tracks the top 500 stocks. There’s a yearly rebalance. But otherwise, there’s no allowance for strength or weakness. It includes the best stocks, and the worst.
Quant Trader is more selective. The only way into the portfolio is to meet the entry criteria. This reduces over 2,000 ASX listings to a concentrated list of opportunities.
You could say that it’s an ‘inner market’ — a market within the market.
And look at the result…
Quant Trader’s smaller portfolio is well above of its starting point. The same can’t be said for the All Ordinaries, which isn’t much above the March 2015 high.
There’s no reason you can’t have this sort of advantage.
The key is to buy into strength. Not only does this help identify the best stocks, it also keeps you out of many of the weakest stocks — the ones that could drag your portfolio down.
So forget the ASX’s 2,000 stock lottery.
Instead, focus your attention on the inner market.
That’s the best way I know to put the odds in your favour.
Until next week,
Editor, Quant Trader
PS: Finding the best stocks is hard. Your job is that much trickier when you have over 2,000 possibilities. It can feel like trying to pick the winning lottery combination. Our analyst Sam Volkering has picked out four Aussie stocks he believes could be top performers in 2018. Check out his free report ‘The Four Best ASX Stocks for 2018’.