Things to Know Before Your Next Trade
by Kevin MatrasSeptember 09, 2011 | Comments : 0 Recommended this article: (0)
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We've all heard the old adage: knowledge is power.
It's a great saying because it's true.
And that saying couldn't be truer than when it comes to investing.
Take a look at your last big loser for example. After analyzing what went wrong, you soon discover some piece of information that 'had you known that, you never would have gotten into it in the first place'.
I'm not talking about things that are unknowable, like inside information or surprise announcements that can catch even the most professional of professionals off guard.
I'm talking about things that you could have known about or SHOULD have known about before you got in.
Did You Know?...
- Did you know that roughly half of a stock's price movement can be attributed to the group that it's in?
- Did you also know that often times a mediocre stock in a top performing group will outperform a 'great' stock in a poor performing group?
- And did you know that the top 50% of Zacks Ranked Industries outperform the bottom 50% by a factor of over 5 to 1. Five to one!!!
- And did you also know that the top 10% of industries outperformed the most?
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Was your last loser in one of the top industries or in one of the bottom industries?
If it was in one of the bottom industries, you should have known to not take a chance on something with a reduced probability of success.
That's what is meant by 'knowledge is power'. Knowable things that you need to know.
That's not to say that stocks in crummy industries won't go up -- they do. And that's not to say that stocks in good industries won't go down -- because they do too.
But more stocks go up in the top industries and more stocks go down in the bottom industries.
And since there are over 10,000 stocks out there to pick and choose from, why settle for one with a reduced chance of making any money?
Did You Know?...
- Did you know that stocks with 'just' double-digit growth rates typically outperform stocks with triple-digit growth rates?
- Did you also know that stocks with crazy high growth rates test nearly as poorly as those with the lowest growth rates?
Did your last loser have a spectacular growth rate?
If so, and it got crushed, would you have picked it if you knew that stocks with the highest growth rates have spotty track records?
It seems logical to think that the companies with the highest growth rates would do the best. But it doesn't always turn out to be the case.
One explanation for this is that sky high growth rates are unsustainable. And the moment a more normal (albeit still good) growth rate emerges, the stock gets a dose of reality as well.
Instead, I have found that comparing a stock to the median growth rate for its industry is the best way to find solid outperformers with a lesser chance to disappoint.
Did You Know?...
- Did you know that adding a simple valuation metric can turn a good Price Momentum screen into a great one? That's what we did with our Big Money Zacks screen that was up 101.3% last year.
- Did you know that by adding two additional filters to the Zacks #1 Rank stocks, it narrows that list down from 200+ stocks to a more manageable 5 stocks? That's what we did with our Filtered Zacks Rank 5 screen that has shown an average annual return of over 56.8% over the last 10 years.
- Do you know what an R-Squared Growth rate is? What if you did? We have a screen that utilizes this seldom looked at item that was up 29.2% last year and was even up 14.2% in 2008's bear market, while the S&P 500 was down -37%. That screen is aptly called the R-Squared EPS Growth screen.
Do you know how well your stock picking strategies have performed?
Whether good or bad do you know why?
Do you know if your favorite item to look for is helping you or hurting you?
Get the answers to these questions and more. And discover what works and what doesn't before your next trade.
To help you get started, you may want to look into our Zacks Method for Trading: Home Study Course. It's an interactive online course that guides you to better trading step by step. In it, we go over in detail how to identify what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market, regardless of what the market is doing. It also goes over some of our best performing strategies from a variety of different trading styles, and it shows you how to create and test your own.
If you're interested, be sure to check it out now. Since every penny counts in today's volatile market, were making this course available to you at its lowest price ever. But only until 11:59 pm. Saturday, September 10.
Thanks and good trading.
Zacks VP Kevin Matras is our chart patterns and stock screening expert. He runs the Research Wizard and personally developed many of its built-in market-beating strategies. He also directs the Zacks Method for Trading: Home Study Course.
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