Are You Afraid of What You Will Miss?
Stockscores.com Perspectives for the week ending August 5, 2005
In this week's issue:
There are approximately 15,000 actively traded stocks on the major North American stock markets. That gives investors looking for a stock to trade a lot of choices. Good traders respond to these varied alternatives by being selective and taking the best of the best. Struggling traders end up taking marginal opportunities that may not have a high probability of success. What causes traders to trade marginal opportunities?
Most trading mistakes come down to one of three things:
- lack of trading knowledge
- succumbing to fear
- succumbing to greed
An experienced, well trained trader should know how to trade and identify good opportunities. Despite their knowledge and skill, many of these traders still take marginal trades because of one of the other two mistakes. Simply put, they are afraid that they will miss out on something good.
Most traders can remember a time when they thought about entering a trade but decided not to because the set up was less than ideal. What makes the memory stick is when that trade turns out to be a great money maker. Being left on the curb as the bus is leaving the station on its way to Profit City is frustrating.
The next time a marginal trading opportunity comes along, we decide to take the trade. Essentially, we are reacting to our painful memory of missing out on the previous marginal trade that proved to be successful.
We are afraid of missing out, and are eager to make money. Blinded by fear and greed.
A marginal trade is marginal because it has a lower probability of success. Keep in mind that the nature of probability is that there will be instances when the low probability outcome occurs rather than the high probability outcome. Otherwise, we would be talking about certainty and not probability.
If you are looking at a marginal trade, it probably means that the expected potential for profit is less than 60%. That means that the trade will work some of the time. The problem is that we remember those times that it did work and take the trade the next time a similar set up occurs. But, because probability is not on our side, that reactionary trading decision often leads to a loss.
The real problem comes when our losses affect our confidence. With the losing trade fresh in our mind we tend to shy away from high probability trades because we are afraid of losing again. The problem is not the quality of the trade that we are considering but our conditioned response to risk as a result of taking a marginal trade.
Any time I have a streak of losers I find that I almost always have taken some marginal trades, those that do not quite fit my trading criteria. When I go back and analyze these trades I realize that the problem is not in my rules but the undisciplined application of my trading rules. By getting back to disciplined trading I almost always reverse my losing streak.
Our brains are wired to remember pain. The pain of missing out on a good trade can lead us to take a marginal trade. What good traders remember is that there are a lot of busses leaving the station. By sticking to their disciplined trading approach, good traders will find the high probability trades that provide some nice rides and for those marginal money makers that we miss, remember that there is always another bus.
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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.
The Nasdaq market has had a pretty good run over the past few weeks, but is showing signs that there is some profit taking that will slow its momentum. August is traditionally a weak month for stocks so it makes some sense that we will see a pull back in some of these strong Nasdaq stocks.
With that in mind, I ran the Rolling Over strategy market scan on the Nasdaq market to find some stocks that may be good short sell candidates for swing traders. Here is a couple that I think can go lower in the relatively short term.
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1. OPWV
OPWV broke down on Friday from a falling top pattern with very abnormal volume. The breakdown created a break of the upward trend line that has held up for four months. It looks to me like investors are taking profits and that could snowball in to a pull back to around $16 in the short term. Resistance is at $18.90.
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2. DOVP
Late this week, DOVP broke its upward trend line and looks like it is going to make a pull back. I think the stock could bounce back early next week as momentum players try to snap up bargains, but the break of the upward trend line tells me that this sort of bounce probably won't last too long. Provided the stock does not hit new highs, I think we could see it pull back to $18.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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Strategies that can help you find new opportunities.
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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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