Stockscores.com Perspectives
For the week ending March 27, 2004
In this week's issue:
I have often said that trading the stock market is simple, but not easy. I can teach someone my stock trading strategies in a two day classroom session, and most people find it relatively easy to understand. When my students leave the classroom, they are full of optimism about trading the stock market, but most will make critical mistakes when they actually start to trade. The emotions that come with putting money on the line are what turn the simple application of my trading rules in to a difficult endeavor for some aspiring traders. Here are some common psychological breakdowns and some suggested remedies.
It has been said that beauty is in the eye of the beholder, and so to, is a good chart pattern. It is quite common for my students to send me a question about a stock that they feel has a highly predictive chart pattern, and I am left wondering if they were looking at the chart through rose colored glasses. I have come to realize that what makes good chart patterns is subjective, and identifying them requires practice. More importantly, chart pattern recognition is subject to emotions, and many traders will see what they want to see. The traders' standards may fall if a trader is eager to make a trade or if they own the stock already.
For this reason, I stress that traders should not trade because they need to make money. That seems oxymoronic, since we all trade the stock market to make money, but the difference is in whether our motivation is need or desire. When we trade out of necessity, we tend to force the market, and often see things that simply are not there. Good traders know that there are times when it is better to do nothing, and wait for excellent opportunities. Desperate traders will make mountains out of mole hills.
While most of us spend more time learning methods for finding stocks to trade, most mistakes come after we enter a position. The greatest problem that I have in trading is an inability to let profits run. Like so many other traders, I often sell too early. There are a number of reasons why this happens.
Watching the market tick away before your eyes is hypnotic. The closer you watch the trading activity of a stock, the faster your heart pulses and the higher your blood pressure rises. I am not sure why video game manufacturers have not found a way to package this in a game, for it is as intoxicating as guiding Pac Man through a maze of dots.
The problem is that the market hypnotizes us in to making bad decisions. With every tick of the real time stock chart, we get closer to hitting the eject button on a trade. The simple remedy, then, is to not watch the trading activity of the stocks we own. After all, watching it won't change what happens, it only affects how we respond to the market's stimulation.
When I enter a trade, the first thing I do is set a stop loss. By doing so, I know that my down side is limited and I don't need to watch the market for a signal to take a loss. That gives me peace of mind, and allows me to take my eyes of the trading screen. Since my selling methodology is based on signals from five minute charts, I really only need to check my stocks every five minutes. If there is a signal to sell, then I do so. Otherwise, I can look for other opportunities or watch Jerry Springer.
Another thing I recommend traders do is turn off their profit and loss indicator. How much money you are making or losing is irrelevant to the trading decision, so why count your money? We do so because it is the center of our universe when we are trading, but it is also a reason to make bad decisions. Check the charts for entry and exit signals, not the financial scoreboard.
I often advocate a lazy approach to trading. You can not work harder to find opportunities; the market won't give you one to reward you for your effort. Good opportunities are not hard to find, they are obvious. Working hard often causes us to identify marginal opportunities that can only be uncovered with extra sleuthing.
However, that does not mean that good trading skills can not be better developed with hard work. The trader who spends more time practicing the art of reading charts, analyzing past trades for errors and developing new ways to control emotions will improve their trading skill. Successful stock traders make a lot of money because they work hard at becoming better traders.
After trading for 15 years, I still analyze the opportunities of every trading day to see what I missed, and what I did right. The more charts you look at, the better you will get at reading them. You can never stop learning.
My final point is one that relates to one of those over used colloquialisms that pervade every self help book out there. You can give a man a fish, and he eats for a day. You can teach a man to fish, and he eats for a life time. Too many traders are relying on other traders, trading systems, indicators or hope to make them money. The only thing that will make you a successful trader is you. I spend time in the Stockscores Live Chat to teach our members how to identify and execute trading opportunities. The successful traders I have taught do not wait for me to tell them what I am buying and selling, they strive to identify those opportunities first. I encourage our members to ask me questions about how to trade, or how to identify opportunities. I am not doing anyone a favor when I tell them what to buy or sell (and so I don't). No one cares more about your money than you do, so take control of it.
Trading is simple if we keep our emotions out of it. All my new students grin and nod when I tell them that, as if to say that they will have no problem following the rules and maintain a disciplined, unemotional approach. And yet, when they actually start trading with their hard earned money, many will enter inappropriate trades, sell to early, or fail to sell when the market proves them wrong. Successful traders work hard at mastering their emotions, and reprogramming their brains to trade well. Easy to say, harder to do, but the rewards of mastering stock market trading certainly make the effort worthwhile.
Back To Top
The Dead Cat Bounce strategy leverages emotion. When stocks fall fast, eventually some people sell out of panic, rather than a rational assessment of the company's value. This causes a stock to fall to lower than it deserves, and creates an opportunity when the market recognizes its error and bounces the stock higher.
This week, I ran the Dead Cat Bounce market scan. This is a swing trading strategy with an anticipated hold period of 1 to 5 days. The idea is to buy stocks on their bounce, and sell them a few days later when the market has come back from oversold conditions.
The scan revealed only one candidate, but is is an excellent example of the chart pattern set up that I look for.Back To Top
1. CMCO
CMCO has made a rapid fall over the past week, and has come down to a previous trading range where the market has some price support. Friday, the stock hit a new low in the morning but managed to come back well in to the close to end above its open and up for the day. That is a sign that sellers are getting exhausted, and buyers may bargain hunt this stock to take it back up over the next few days. Support is at $6.35 on the trade, and I think the stock could come back up in to the $8 range next week. This is a trade appropriate for more active traders who can monitor market activity more closely.
Back To Top
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.
Back To Top
|
If you wish to unsubscribe from the Stockscores.com Weekly Perspectives or change the format of email you are receiving please visit here. Copyright 2003 Market Perspectives Inc.
|
