Being Human
Stockscores.com Perspectives for the week ending August 18, 2006
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In this week's issue:
One of the important services I provide to our StockSchool Pro students is the mentoring that I do after they take our course. Trading successfully is simple, but not easy. The best lessons come from actually applying the Stockscores Approach in real market conditions. So, when a person begins to trade with real money and encounters the emotional hurdles that prevent success, I can do a lot to get them on track and trading properly.
As part of the mentoring process, each day I answer questions from our Pro members. It is interesting to see how the same issues and mistakes come up over and over. All aspiring traders start with the same disadvantage, their human nature to avoid pain and pursue pleasure.
Here is a recent email question that I received from one trader that I think demonstrates what most traders have to work to overcome. Perhaps my response to his questions will help you become a better trader also.
Please say a few words about one of my most common screw ups. Here it is in a nut shell---
1) Many times I make the mistake of getting swept away by the short term emotion in the market and sell my winners too soon, as it turns out to be a shallow correction to the longer term trend.
2) Many times I make the mistake of hanging on to my losers too long because the long term trend says that I have support for my plan.
3) Most times my intent is also to capitalize on deep swings of strong stocks, my constant flipping between long and short term trends seems to confuse me in the heat of the moment, and I either hang on to my losers too long, or don't sell soon enough on the swing exit .
All of these problems can be summed up in one word.
Fear.
Scared money makes mistakes. We sell our winners too soon because we are scared that the profit will turn in to a loss. We remember the time that the good feeling of a quick gain turned in to the pain of suffering financial loss and that feeling of pain sticks in our memory much stronger than the feeling we had when we made money by being patient.
It is also the fear of loss that causes us to hold our losers too long. We hope that the weak stock will turn around; we focus our analysis looking for a reason why the stock should turn around so we can avoid the painful feeling of exiting at a loss. We tell ourselves that if we sell, the stock will turn around right after.
As our fear causes us to make trading mistakes we begin to have self doubt and our confidence wanes. Soon we are adding new indicators to our charts, seeking new trading strategies and making entry and exit decisions that have no foundation in the rules of the adopted trading approach. This emotional downward spiral often culminates in a big loss that is the product of broken rules and a lack of discipline.
Every time I teach a StockSchool class I tell my students that they will make mistakes because of emotion. Not because I am a bad teacher or because they are bad students, simply because we are all programmed from childhood to avoid pain and pursue pleasure.
But there is some hope. Traders are the highest paid people in the world. At $80 million in earnings last year, Tiger Woods can not come close to energy trader T. Boone Pickens who last year raked in an estimated $1.2 billion. The people who work hard to overcome the emotional aspects of trading get the prize. Here are some suggestions to help you get on the list of trading successes:
1. Plan your losses before you enter the trade - the moment you take ownership of a stock you create an emotional attachment to it. Before you take a position, use your rational mind to identify the point where the market will prove you wrong and make it necessary to take a loss.
2. Accept pull backs from new highs - Good up trends don't happen without minor pull backs. A pull back from a new high is ok, a pull back from a falling top is usually not.
3. Write down your trading rules - you can't follow rules that you don't clearly understand. Right them down and look at them before you enter any trade. Don't break your rules.
4. Get leverage on yourself - most of break our trading rules because we don't see retribution for doing so. Have your spouse check to see if you are following your rules. Journal your trades so you can see the pattern of pain created by failing to trade your plan. Hit your finger with a hammer when you break a rule.
5. Be comfortable with your risk - if more you care about your money, the greater the chance that you will make trading mistakes. The most successful traders are those who don't care about losing. If you care too much then you are taking too much risk. Scale it back.
6. Love what you do - we do best at the things that we enjoy. If you despise studying the market and making trades then quit and get someone to manage your money for you.
7. Keep it simple - making money in the stock market is about understanding human behavior. Don't make it too complicated, simple rules and a simple plan will outperform sophisticated indicators and a complex decision making process.
Helping others see their trading mistakes makes me a better trader and hopefully sharing the challenges that another trader is facing helps you as well. The slow summer markets are drawing to a close so it is time to sharpen your trading skills and get ready for the Fall.
Trade well.
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This week I ran the Sentiment Crossover Strategy, limiting my results by only seeking stocks that had at least 500 trades on Friday. This strategy looks for stocks that have a Sentiment Stockscore that was below 60 yesterday and is now at or above 60 today. I then look at the charts to see if the patterns are good. I like to see stocks that have had a low Sentiment Stockscore for a while and a price chart that is breaking higher from a rising bottom, but one that has not gone up too much already.Back To Top
1. RFMD
RFMD made a break from a rising bottom early this week after breaking its downward trend line about a month ago. With the Nasdaq strengthening, it looks like may be reversing its long term pessimism. We may get a pull back from this week's strength in the short term but so long as support at $5.90 can hold, I think the stock has good potential.
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2. SEAC
SEAC is showing a rounding bottom chart pattern, a gradual move from pessimism to optimism and is now starting to work its way through resistance. I would put support at $6.85 and watch for a break through Friday's high of $7.15 for an entry signal.
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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.
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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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