good read here from the BTS board. Came from Stockscore newsletter.
stockscore commentary
I am sitting here thinking about whether stock trading is an art or a science, and having a hard time deciding. As a trader, I tend to approach the market with some rational deduction, but yet I have found that applying the rules of logic to trading rarely works. While it would be nice to say "buy when x and y occur", it is usually not possible to take such a simplistic approach. Instead, good traders seem to have an artistic approach to the market.
What is the difference between art and science? Perhaps science is the recognition of facts, while art is one person's interpretation of facts. Perhaps science is knowing something with certainty, while art is simply a matter of perception.
I think this is where the confusion comes for stock traders. Financial theory assumes that stock prices are based on a matter of facts, that stock price is rooted in the ability of the company to make money in the future. Theorists argue that the market is a forum for debate where investors scientifically deduce a company's value based on the facts of its business. But is this really what happens?
It is relatively easy to find stocks that are trading above their scientifically derived fundamental value, or far below what even their liquid assets are worth. If the market is a science lab where rational thought and logical deduction rule, would these errors in stock pricing not be impossible?
Throughout time, there have been many examples of stocks that simply traded far beyond their fundamental value. During the Technology bubble that burst with the start of the Millennium, many stocks traded at ridiculous fundamental valuations. Of course, with hindsight, that is an easy assertion to make.
Equally hard to prove scientifically were some of the lows that these same technology stocks hit in the years following the big bang of the tech stock bubble. Some stocks traded at prices less than the cash per share that they held in the bank. So, why the discrepancies in a financial world that is supposed to be scientific?
My belief is that the answer lies in the truth about how stocks are priced. It is not a matter of science, of knowing what the facts truly are. Instead, the market values stocks based on perceptions. Each trader is painting his or her own picture of what a stock is worth. While most investors do not have the artistic prowess of Monet, those who understand the art of the stock market are able to make the Money.
Stock trading is a science, but it is the science of interpreting an art. How investors value stocks is not about fundamentals, it is about the perception of fundamentals.
So why argue the point? Because, to be a good trader, you have to recognize that price movements can not be explained with logic, and good traders never try to do so. Instead, good traders try and figure out what the crowd will like, or dislike, and that is a matter of perceptions.
What makes a Picasso valuable? Why does Elton John have so many number one songs? Why does Stephen King sell so many books? The answer is simple; because the crowd likes them.
Stocks will go up if the crowd likes them, and will go down when they fall out of favor with the masses. And what makes the crowd like or dislike a stock is as complicated as what makes the Michelangelo's frescoes in the Sistine Chapel such an amazing work of art. Don't try to figure it out, just enjoy it.
And in the stock market, don't try to figure out why a stock is going up or down, just figure out what the perceptions are and trade with that knowledge. That is why chart analysis makes so much sense. Every stock paints a picture, and you just have to interpret how the right side of the painting will look in the future. This is the science of interpreting art, and is what trading is all about.
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Stocks go up in price because investors are willing to pay more. Investors tend to buy companies that they are optimistic about, so it is important to measure whether investors are generally optimistic or pessimistic about a company. Stock charts can provide many clues about the mood of the market. For example, rising bottoms on a stock chart indicate greater enthusiasm among buyers than sellers.
The Sentiment Stockscore considers these kinds of chart pattern factors, and provides an indication of whether investors are showing optimism or pessimism. I have found that stocks that have a Sentiment Stockscore moving through 60 and rising tend to continue to rise as investor optimism carries them along.
The Sentiment Crossover Market Scan seeks stocks that have their Sentiment Stockscore crossing in to the 60 and greater zone after a lengthy period below 60. If this occurs, and the stock does not have significant overhead resistance, then there is a good potential for a future uptrend. By limiting downside potential with a stop loss point just below a short term support price, investors can better manage risk while leaving the potential for price gains.
This strategy is good for identifying longer term trades that do not require constant monitoring. The criteria are relatively simple, and a regular check of positions for an exit signal may only take a few minutes.
1. KEG
KEG has made a double bottom pattern, and is now working on a break through resistance at $10. The Stockscores are in the right place, and the chart looks pretty good so long as support at $9 is not violated.
2. FMT
FMT appears to have good support at $17.50, and is finally showing some rising bottoms on the price chart after months of weakness. This show of optimism is bringing the Sentiment Stockscore above 60
3. T.ENE
In a good energy market, T.ENE has done nothing good. However, the stock appears to be reversing its long term weakness as investor interest is renewed. The downtrend has been broken, and after the Sentiment Stockscore has been below 60 for lengthy period, it is now rising.
I only hope that my presence here today will help the world of tomorrow
