Do You Have a Plan
Stockscores.com Perspectives for the week ending November 18, 2006
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In this week's issue:
Trading decisions are often made in the blink of an eye, the result of a sometimes emotional thought process. Maybe you want to find a stock that will go up to pay for the loss you just suffered on a previous trade or you enter a trade because you are tired of watching it go up without you. These impulse decisions often lead to losses and show why it is important to have a well thought out plan when making a trade.
Planning your trades means you will likely trade less, leaving many marginal opportunities for those that have the best profit potential. When you make a plan you establish a series of criteria for entering and holding a position. You write down those criteria and check to see how your stock is trading relative to your plan. If it is behaving the way you expect then you have understood the stock correctly. If not, it may be better to get out of the position.
The best trades are those that you have the most confidence in. Confidence comes from being proven right, from having the market live up to your expectations. You are probably not too sure of whether you are right or not if you find yourself monitoring your positions every possible moment.
A key to having a good trading plan is to have a good method. You need a good method for entering a stock and managing risk. You need a good method for exiting a stock. You need a good method for managing your emotions through the process. Once you have a method that works and is one you can believe in, you can write the plan. Plan the trade and then trade the plan.
A plan should at least answer the following:
What is my strategy for entry?
What is my risk tolerance?
What do I expect to happen after I enter the trade?
What has to happen for me to consider my decision to enter the trade wrong?
What are my criteria for exiting the trade at a profit?
What are the emotional obstacles that I will face and how will I overcome them?
How will I judge my success?
How will I learn from my mistakes?
Is all this worth the effort? The little bit of time that it takes to make and follow a trading plan should improve your performance in the market. Is it worth it to make a plan when building a house? Is it worth it to make a plan when starting a business? Most of us answer yes to these questions but fail to plan our trades. Why?
The answer lies in emotion. Too many traders treat the stock market like a casino. They make trades with the hope that they will make money just like a gambler puts down money on the hope their number will come up. Hope should not be part of your plan. If you are a trader who believes your success in the market is a matter of luck then you should probably close your brokerage account and head to Las Vegas. At least there they give you free drinks when you gamble.
Think when you trade. Impulsive decisions are not likely to succeed. Well thought out trades may not always succeed either but at least you will have a means to judge when you are wrong. When a trade ceases to go according to plan, it is time to get out.
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This week, I went looking for short selling opportunities by doing a very simple Market Scan with the following settings:
Abnormal Activity - Abnormal Day Down
Abnormal Volume
Number of Trades > 500
This scan revealed 22 candidates. I inspected the charts of each, looking for stocks that have been doing well but have broken their upward trend lines. From the list, I found two standouts that I think are likely to go lower in the weeks to come.
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1. INTU
INTU had a bad day to the downside on Friday and broke its upward trend line. I am not eager to short the stock at this price level as I think a short term bounce back is likely. I would like to see the stock come up for a few days and then short it if it breaks downward from a flag pattern. My expectation is that this could happen around the $33 - $34 price level. If the stock were to come back up and close above $35 I would consider the trade a bust and forget about it.
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2. ANN
ANN also broke its upward trend line on Friday with abnormal trading volume. It looks likely to go lower from here but I think it would be a better trade if the risk factor improved. Right now, resistance is at $40.50 and the stock is at about $36.50. If the stock could come up a bit and narrow that gap then there would be less risk on the entry and improved reward. I would like to see it have a few up days in a row with some green candle days and then short it on the first red candle day, hopefully around $38. If the stock keeps rising and gets up through $40.50 then the market has reversed its negative sentiment and the stock is no longer worth shorting.
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References
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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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