Stock Trader’s Corner — Correction in Tech Stocks is Over
In today’s Money Weekend…a big return in three weeks…a good idea isn’t enough…think globally…and more…
Three weeks ago, I mentioned there were five Aussie tech stocks that I noticed had been treading water while most other tech stocks were selling off.
At the time I said:
‘When the correction in tech stocks is over, it will be the tech stocks that no one was willing to sell during the correction that will probably have the best rally.
‘The list of tech stocks that are treading water during this correction are Dubber Corporation Ltd [ASX:DUB], Emerchants Ltd [ASX:EML], Money3 Corporation Ltd [ASX:MNY], Codan Ltd [ASX:CDN], and Catapult Group International [ASX:CAT].’
Since I wrote that article, this is how those stocks have performed:
- Dubber Corporation Ltd [ASX:DUB] is up 30%
- Emerchants Ltd [ASX:EML] is up 12%
- Money3 Corporation Ltd [ASX:MNY] is up 3%
- Codan Ltd [ASX:CDN] is up 16%
- Catapult Group International [ASX:CAT] is up 14%
That’s not a bad return in just three weeks!
It didn’t take an algorithm from a Yale graduate or a month studying profit and loss reports.
It just needed the power of observation and the ability to think outside the box in looking for opportunities.
The point I am trying to make is that you have the ability to find great trades if you are willing to put in a bit of effort.
None of us have a crystal ball. We are all forced to make decisions without perfect information (I know I say that a lot, but it’s important stuff so I like to repeat it).
Predicting where things will be in a few years’ time by studying macro-economic indicators is a fool’s errand. Just look at how markets have moved over the last couple of years. Your job isn’t prediction. Your job is risk management.
A good idea isn’t enough
If we delve a little deeper into the example I gave you above of five stocks that were treading water during the recent tech correction, it soon becomes apparent that the observation itself is the tip of the iceberg.
From there I need to work out exactly when to get in, where I am proven wrong and where my targets are. Then I have to work out how large the positions should be based on my starting capital, my level of conviction and my assessment of the risk.
Once I am in a position there are many things that can happen which will throw my initial trading plan off course.
What if Money3 Corporation stays at the current price for the next 6–12 months? Do I dump the position? When? Just when I wake up one day and decide I’m sick of it? What if Dubber rallies 200% in a straight line and then turns and falls in a straight line back to my entry price?
If I don’t have a set of rules to cope with all the weird and wonderful ways that stock prices move, I will end up making bad decisions at the wrong time regardless of how fabulous the initial insight was.
Your success or failure over the long term will rely on answering the questions above.
You have to think globally.
What will happen over the next 50 trades? Not the next one.
If you make $10,000 on a trade and then lose $5,000 on the next trade, you have made $5,000 over two trades or $2,500 per trade.
Can you change your thinking so that you see the $10,000 win as only $2,500? Even harder, can you see the $5,000 loss as a $2,500 win?
If you are doing some trading, are you aware of your strike rate and risk/reward? Are you keeping track with a spreadsheet and constantly updating your data and analysing how you are going? Do you sit down on a regular basis and reflect on your past actions and think about how you could improve your performance?
Even if you are relying on someone else’s trade ideas by subscribing to one of our trading services, you still have many decisions that you need to make along the way about money and risk management.
Position sizing is key
If you change your position sizing willy-nilly based on how confident you feel that day or whether your last few trades were wins, you can completely change the trajectory of your P+L over time compared to the expected outcomes of the strategy.
A trading system you are following may be a winner, but your results may not reflect that due to your ad hoc approach to position sizing.
Our emotions often get the better of us. In the trading environment it is uncanny how often our emotional reactions to situations we find ourselves in usually lead to terrible decisions.
Accept that about yourself and start implementing rules that will guide you through the mayhem.
You don’t have to follow the rules that I follow. They’re just the ones I found suited my personality. Now that I have them, I feel confident to get involved in any type of market.
I know I can survive no matter what and from there I can start chasing higher returns. It isn’t rocket science at all.
I showed you five stocks three weeks ago that I thought would rally and my reasoning wasn’t based on anything other than relative performance during a correction.
Four out of the five stocks are up between 10 and 30% in three weeks.
Now it’s your turn.
For Money Weekend
P.S: Promising Small-Cap Stocks: Market expert Ryan Clarkson-Ledward reveals why these four undervalued stocks could potentially soar in 2021. Click here to learn more.