10 Reasons to Quit Trading the Stock Market
Stockscores.com Perspectives for the week ending March 12, 2005
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In this week's issue:
If you are trading the market, you should always be wondering if you have what it takes to succeed. Anyone can beat the market, but a lot of people won't consistently make money because they don't have a good method or emotional control. Here are some things to help you decide if you can succeed as a stock market trader.
10 Reasons to Quit Trading the Stock Market
1. If you think you know enough, quit trading the market - The market is dynamic. Although it is based on the same principles of human behavior, you always need to be working to learn more about how to beat it. Develop and test new strategies and find better ways to follow your rules.
2. If you don't use stop losses, quit trading the market - you will not be right all of the time, so it is important to limit losses on those time when you are wrong. The failure to do so will mean you inevitably hold a stock that suffers a big loss, and potentially wipes out the gains of a number of your winners. Before you buy a stock, plan the price point where you will consider the decision to buy wrong, and plan to exit when the stock falls to that price.
3. If you don't let profits run, quit trading the market - there will be times when you pick a hot stock, and it is important to let that hot stock move higher until you get a signal from the market that the stock is likely to go lower. Don't sell a stock because it reaches a price point, don't sell a stock because you want to enjoy the good feeling of locking in a profit. Be patient and sell when the market tells you to sell.
4. If hope is part of your trading plan, quit trading the market - I like to tell people that hope belongs in the church and in the bedroom, not in your stock trading decisions. If you own a stock that is not making you money, and you find yourself hoping that it will turn around, then you are probably destined to suffer a bigger loss. The market does not care what happens to you making it important to judge the market rationally and without emotion.
5. If you can't make money paper trading, quit trading the market - to be a successful stock market trader, you need to have a set of rules that works. You need to test that those rules work by paper trading your plan, and proving that you can consistently make money. If not, then don't progress to actually trading because trading with real money is harder since emotion comes in to the equation.
6. If you really need to make money trading, quit trading the market - the less you care about the outcome of your trades, the better your trading decisions will be. Emotion is the enemy of the stock trader, and having a strong need to make money in the market will cause you to be more emotional. If paying your bills each month depends on the trades you make, you will probably make bad trades.
7. If you don't see both sides of the argument, quit trading the market - when you buy a stock, there is seller on the other side of the trade who has a different opinion from yours. One of you is wrong, so make sure you try to understand what motivates the seller when you are buying. By seeing both sides of the argument, you can make better decisions.
8. If you use public information to make decisions, quit trading the market - prices change on what the perception of fundamentals will be, not what they were. Trading on old information has no benefit because that information is already priced in to the market. If the market knows that ABC Pharmaceuticals has a cure for cancer, you can bet that the stock price will have gone up to reflect that achievement. Opportunity exists when there is important new information coming, not when it has come.
9. If you don't realize that there is an information bias, quit trading the market - some may call them overly optimistic, others may call them liars. Recognize that a lot of the information you receive about companies and where there stocks are headed is biased. Don't believe everything you see, hear or read. And if something smells fishy, it probably is.
10. If you are afraid of losing, quit trading the market - when you have a fear of suffering losses, you tend not to take losses when you should, or you sell too early and don't give the stock a chance to do well. Don't take too much risk on any one trade because it will cause you to get too emotional out of your fear of suffering a loss. Losing is part of stock trading, accept this and make losing part of your trading plan.
Of course, this list is also designed to highlight what you need to do if you want to make money in the market. Look down this list and do the self analysis necessary to maximize your trading profitability.Back To Top
Up trends do not last forever, and eventually stocks succumb to a shift in psychology and a retracement of recent gains. The Rolling Over Strategy seeks out stocks that are breaking down from pessimistic chart patterns after a good up trend. Stocks found with the Market Scan may represent good short selling opportunities for longer term traders.
Pessimism is best represented on a stock chart by falling tops. Falling tops indicate that, over time, sellers are gaining strength and buyers are losing their motivation. When stocks consolidate with falling tops, the pessimism is complemented by growing consensus on what the stock is worth. As a market comes to consensus above a support price, a potential trading opportunity takes shape.
We get a signal that the bears have taken hold of a stock when three phases have run their course.
The upward trend line has been broken
A price consolidation has evolved, preferably with a falling top signaling pessimism.
A penetration of support occurs.
A good short selling opportunity occurs when these three criteria appear, particularly on stocks that have made considerable price gains in the most recent three to six months. As traders take profits off of the table, and fear begins to build among owners of the stock, the downward momentum in the stock can increase, creating a profitable trade for the short seller that established a position on the breakdown.
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1. KVHI
KVHI is breaking down from a pessimistic descending triangle pattern through support at $10 after hitting its long term downward trend line. It looks like the sellers are taking control of this stock, and it should fall in the weeks to come. This stock is optionable, making it possible to play this set up with a put option.
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2. ACV
ACV is presenting what is probably a shorter term trading opportunity as the stock breaks down from a falling top after a decent up trend that lasted four or five months. It may stall at $50 for a little while, but it appears that the investor optimism is leaving the stock. This stock is optionable, making it possible to play this set up with a put option.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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