What Separates the Good from the Lucky?
Stockscores.com Perspectives for the week ending March 23, 2008
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In this week's issue:
Most traders and investors, even those that make their living at it, can not be considered good at it. Those that can consistently beat the market year after year are few and far between; perhaps 95% of investors are unable to achieve this feat.
Now, consider a group of 1000 traders. If 5% of them are consistently successful and 95% are not, then there are 950 people who are unable to consistently beat the market. But, what percentage of that 950 can get lucky and have a good year? A person who happens to buy the right stock or play the right sector at the right time can get lucky and enjoy big gains. I have seen many people who really did not know what they were doing make big profits in the market, although most of them eventually give it back in subsequent years. Legendary Vancouver stock promoter Murray Pezim once said that profits in the stock market are just short term loans.
So, it is probably quite reasonable to say that 10% of the 950 could get lucky, making a group of 95 that have a good year and able to post market beating returns.
The next year, 10% of that 95, or 10 traders, will have another good year. And the year after that, one from this group will again have a good year and be able to boast that they have beat the market three years in a row. Now, when you consider that there are millions of people investing in the market you can see how some lucky investors could beat the market 5 years in a row.
But are they really good?
There is still the group of investors who do consistently beat the market; people like Stevie Cohen or John Paul Tudor Jones III have done so year after year. But the reality is, most can not expect to take money out of the market over many years.
What separates the small group of small investors from the larger group of poor performers or the lucky? Here are some characteristics that I have seen among great traders:
Great traders don't care about the money - it is the fear of losing money that causes most traders to make emotional mistakes. A common characteristic among the successful traders that I have taught is that they don't focus on the money; they focus on the message that the market is giving them.
Great traders don't have an ego - since we can not be right all of the time in the market, we need to be humble about our prospect for losses. It is important to take the loss when the market shows that our analysis was wrong. People with an ego want to be right and will fight against being wrong, and that can lead to big losses.
Great traders have an edge - whether you are a technical or fundamental trader, you need something that gives you an edge over the crowd. Good information, intelligent analysis or a proven strategy can give the great trader an advantage over the competition.
Great traders keep it simple - we tend to try and fit our trading rules to our recent trading successes and failures and over time we build so many rules in to our trading strategy that we have a system that is not very versatile across different market conditions. The best strategies, the ones that work over a long period of time, are simple and versatile.
Great traders control risk - you can not invest in the market if you have no money to trade with. If an abnormal move in the market will wipe out your trading funds then you are not effectively managing risk. Remember that leverage is a double edged sword, don't take more risk than you can afford to lose and don't let small losses grow in to big ones.
Great traders look beyond the entry - there is a tendency for traders to focus on buying or short selling the right stock but great traders realize that this is only a part of the successful trading equation. Great traders know how to size positions, how to move in and out of those positions, when to exit the position and how to review their past trades to learn something from them.
Great traders have a winning mindset - a trader who has self doubt, who does not approach each and every trade thinking like they are great at what they do will probably not succeed. Confidence breeds success.
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The US Federal Reserve is doing an unbelievable amount to support the stock market. Providing a swap of $200 billion of bad debt for treasury securities, dropping interest rates another 75 basis points and injecting cash in to a failing brokerage are signs of just how bad the US lending crisis is. Is it enough to stop the stock market from going down any further?
Keep in mind that the stock market is a leading indicator for the economy. Investors are stating that the US recession will not be a long standing one if the stock market can bottom here.
This past week, the Dow bounced off support at 11750, an important area of short term support. So far, the vote has been cast that market prices have based.
However, the long term trend of pessimism remains intact. The Nasdaq did move below support and has not rebounded enough to overcome the breakdown. The Dow still has falling tops on its chart and both are below their long term downward trend line.
So, I feel the long term picture is that the markets are likely to go lower in the months to come. But, I also think that there is a good potential for a short term mini rally in to resistance. Short term traders could trade this mini rally with our Hitting Floors strategy and Market Scan. Longer term traders can continue to favor the short side of the market with the Long Term Breakdown strategy and Market Scan.
This week, I ran the Hitting Floors Market Scan and most of the stocks that came up in the results were resource based. I looked at the charts of a number of Gold and Energy stocks and saw signs that these markets are likely to bounce back from some short term oversold conditions.
Therefore, I think there is a swing trade on some of the resource stocks to take advantage of them moving higher over the next few days or weeks. This is not a long term trade and it is one that has to be closely monitored. However, if you are able to be nimble with your trades, consider the following:
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1. T.FR
Good support on T.FR around $4.10, the stock is almost there now and was able to hold above its open on Friday. Ideally, I would like to see the stock gap down Monday to somewhere around $4.10 and them move up through its open. At the point it goes through the open, consider it for a buy with a plan to dump it for a loss if it closes below $4.10. Upside potential on this trade is easily $5 so that gives a pretty good risk reward ratio of the market gives us this opportunity early next week.
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2. T.IVN
$10 will always be a psychological barrier for any stock, and it has been a floor price for T.IVN in the past. The stock closed just above that on Friday on a close above the open to make a green candle on the chart. I think if we see the stock move through Friday's high of $10.12 early next week then we can go long with the plan to dump it for a loss if it closes below $9.50. A bounce rally could take it up to $13 again which gives the trade a healthy 1 to 4 risk reward ratio.
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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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