The Phases Of Learning to Trade
Stockscores.com Perspectives for the week ending August 23, 2008
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In this week's issue:
I am often asked about the skills necessary to be a great trader. The answer to that question parallels the criteria for most pursuits where excellence is the goal. First, you have to learn the mechanics and then you must learn mental mastery.
The mechanics are the simple and straightforward part of the equation. Traders first need a set of criteria for identifying opportunities, the rules for entry. Some will develop technical analysis criteria, perhaps looking for a convergence of indicators that the traders tests to determine their effectiveness. Others will rely on fundamental valuations, looking to buy stocks that appear to be on sale in consideration of the company's ability to make a profit. Some may combine research methods from both analytical disciplines.
With these rules established, the trader must work to develop a method for understanding and managing risk. I plan to lose on every trade I make, knowing the exact triggers that will make me exit a trade at a loss. For me, I rely on price barriers established by the past actions of traders. Others may use percentage drawdown or even time scale factors to know when to exit. For me, the amount of risk on the trade determines the position size that I take so I always know my exposure to loss going in. This all comes from the recognition that trading requires capital and losing it or tying it up in dead stocks is a quick way out of the trading game.
Then there is the question of when to exit. Again, the individual trader must develop their set of criteria to exit a trade, knowing the importance of sticking with winners and letting profits run. The winners have to pay for the inevitable losers so all exit strategies should factor in some understanding of expected value and probability theory. You can't be right all of the time, but you can change what you do when you are right and when you are wrong.
Finally, since technology now plays a huge role in trading, there is the mastery of the tools that traders use to identify and execute trading opportunities. My primary tool is the Stockscores web site, but I also use real time quote feeds, spreadsheets, order entry tools and information sources to help in my trading decisions. Technology has given traders a lot more power, but also a lot more to think about. The challenge is to separate the significant from the minutiae and remain focused on using technology to make money.
These are some of the mechanics of trading. Just as a golfer must master the mechanics of the golf swing, the trader must master these areas if they are to ever succeed.
But mastery of the mechanics of trading only assures the trader occasional glory. As anyone who has ever seen me golf will attest, mechanics alone will barely get you down to the green. In golf, there are times when the threat of the woods or water call out to your subconscious mind, causing you to overpower your understanding of mechanics and leaving you in search of some small thing that seems to separate you from success.
Trading is no different.
The fear of losing money and the desire to feel the empowerment that comes with trading profits can lead many away from the execution of their trading plan. Learning the mechanics of trading can take mere months, but for some, mastery over their trading minds can never be achieved. For most of us, it is this second phase of our learning where the greatest amount of effort must be spent.
First you have to learn the rules that form the backbone of your trading approach. Then you have to work on understanding why you keep breaking those rules. Understanding that mechanics alone will not make you money is a revelation that often comes to traders long after their brokerage account balances have been depleted. Keep this in mind as you work to master the markets.
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The Pull Back Play strategy is for swing traders who want to take advantage of the short term pull backs strong stocks make back to their trend line. They take a bit more time to research and execute, but the opportunities that come from it can be quite rewarding.
Based on how the US markets closed on Friday, I think there is a good chance that we will get a move higher over the next week or two, so looking for some US stocks that have been strong in the longer term but have suffered losses more recently should work well.
I ran the Pull Back Play Market Scan on Stockscores, focusing on the Nasdaq market and stocks trading at least 1000 times on Friday. I then inspected the charts found with the Market Scan using the Gallery Chart Viewer, looking for those that were in longer term upward trends and where the pull back brought prices back to the upward trend line.
Here are three stocks that I think are worth considering for this trade.
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1. WIND
WIND came back from its high over the last seven days and made a bounce off of the long term trend line on Friday. It should be able to now move to new highs, unless support at $11.50 is broken on a close.
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2. JBHT
The buyers took over control of JBHT on Friday after the sellers had been pushing the stock lower for the previous 4 days. A move through $40 is what I expect if this trade works, but if support at $34.50 is broken, the trade is a bust.
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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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