The Source of Your Mistakes
Stockscores.com Perspectives for the week ending June 20, 2008
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In this week's issue:
There are two kinds of losses, the good ones and the bad. As a trader, I don't expect to make money on every trade and so the good losses are those when I lose money despite doing everything right. This is not to say that the loss feels good, it is just one of those things that I expect to have happen.
Then there are the bad losses, the ones derived from mistakes. I hate bad losses because they demonstrate my inability to keep the fact that I am human out of the trading equation. Nothing is more dangerous to trading than being human.
We need to understand the reasons we make mistakes if we have any hope of eliminating them. Here is a list of mistakes common to traders, how many of these have you made?
Ignorance
Most people who are getting started in investing don't realize how much they don't know. Trading the stock market is about more than just knowing what to buy, you have to also know when to sell, how to manage risk and how to manage emotions. Before you ever buy a stock you should first prove that you have a solid understanding of these four ingredients for trading success. Otherwise, your success in the market will be a matter of luck.
Weak Strategy
You may come up with a set of rules to trade by but have you tested those rules? A strategy needs to have a proven edge. If you say, "I will buy any stock that is below its 200 day moving average and is being bought by company insiders" then you had better go out and test how effective those rules are. Don't only test for the directional movement after an entry signal, but also understand what the drawdowns and riskiness of the trades are. Every trade has to have enough reward to compensate for the risk.
Emotional
If you are a normal person, you don't like to lose money and you like make money. Those feelings set you up for failure because they mean that you are likely to hold on to your losers (because it feels bad to take a loss) and sell your winners (because it feels good to sell a winner and because you worry that your winner will turn in to a loser). These are very simple ideas that do a tremendous amount of damage to our returns. Traders have to learn to take small losses when the market proves them wrong and let their profits grow larger when the market proves them right.
Lack of Focus
Most of have very busy lives. In the typical family, both parents work, often with long hours, and children are engaged in a wide variety of activities that require a lot of time. It is easy to see why we all find it hard to find the time to learn, research and execute our trading strategy. And, of course, it is when you take your eyes off of the market that the most damage is done. You miss sell signals on stocks you hold and watch profits turn in to losses. You miss entry signals that begin a major market move and are left wondering about what could have been.
Mechanics
I have been trading for 18 years and have made thousands of trades, yet I still occasionally screw up how I enter the order. Just today I considered two stocks that both had entry alarms at the same time. One stock was worth shorting, the other was not a great set up. But when I entered the trade I shorted the wrong stock! That little mistake cost me close to $2000 in lost profits. Trading often requires fast decisions in a stressful environment and it is necessary to concentrate on the task and avoid reckless mistakes.
I don't think there will be a single trader who has not made at least one of these mistakes and most will have made all of them. What can you do to avoid them?
Try writing out a trading plan. Learn how the markets work, develop and test a trading strategy, write down the rules, schedule your research and trading time the way you would a meeting, think before you act and don't take so much risk that you get too emotional. All simple things, but they are only powerful if you do them!
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This week, I did a Market Scan for stocks that were moving up abnormally with abnormal volume. I find that catching stocks that do this at the start of a trend, out of a period of sideways trading and through important resistance levels is a good way to find stocks that are likely to move in to long term upward trends. With the weak market on Friday, there were not a lot of candidates found with the Market Scan but there were still a couple of stocks that look pretty good.Back To Top
1. WU
WU breaks from a cup and handle pattern, through long term resistance that has held up going back a few years. Volume was very strong supporting the breakout, I think the stock has good potential to start an upward trend here provided support at $22.40 is not violated.
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2. FNDT
FNDT is breaking from a rectangle consolidation pattern that has been building for the last four months. Volume was very strong Friday as the stock went through resistance at $12.60. The next level of resistance is at $18 and support is at $12.25, giving the trade a little better than a 2 to 1 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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