Learn From Losing
Stockscores.com Perspectives for the week ending May 14, 2011
In this week's issue:
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Learning from Losses
I have yet to meet a trader who has made money on 100% of his or her trades. We recognize that losing in the stock market is part of trading, understanding that the stock market can not be predicted with complete certainty. Despite this admission, most people still get very frustrated with losing and often turn away from the market when it happens.
"I've missed more than 9000 shots in my career, I've lost almost 300 games. 26 times I have been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."
This quote from Michael Jordan demonstrates the importance of losing. Losing teaches us those things that make us better. Being wrong is an important step in learning to be right.
Stock traders can take a loss and learn from it or let it build up bad habits. Unfortunately, most aspiring traders find it too easy to take the path toward bad habits because of the strong emotional attachment we have to money. It is easy to focus on the pain of losing and then work to avoid that pain in the future.
What does this process lead to? The next time the trader is faced with taking a necessary loss they are likely to hang on to the trade. They avoid pain by breaking their rules on limiting the size of the loss. The small loser can easily become a big loser, wiping out the gains made over a number of successful trades.
This is the financial punishment that comes from not controlling the size of a loss but there is a much more damaging effect that comes from letting a small loser turn in to a big loser. When you hang on to a loser for a long time you are also tying up a lot of emotional capital. That brings on healthy impairing stress and reinforces the pain avoidance response. It puts the trader in to a downward spiral toward ultimate failure.
Losing teaches you a lesson; it is a sort of tuition paid to the stock market. If you do not learn from the loss then you have wasted the investment you have made in your education.
The difference between winning traders and those who fail is their response to losing money. Good traders realize that losing on a trade is part of a process and not a single event. You can reverse a loss, you can only take the experience forward with you. It is up to you whether you choose to do that in a positive or destructive way.
There are way too many people trying to become traders for it to be easy. There is a lot of competition for trading success because it is such a great way to create wealth. The adversity that comes from learning how to trade is what makes a good trader great.
This is why you must take losing in a positive way. A trader who studies their losses and learns from them will be stronger and better in the future. The trader who recognizes the difference between a good loss and a bad one will be able to avoid taking the bad losses in the future.
Do not expect to ever stop making mistakes. During the Advanced Trading Class that I taught this past week, I made a trade that was a mistake. I rushed the trade out of the fear of missing it and did not recognize that some of my rules were being broken on the trade. This became clear when studying the trade later, allowing me to put processes in place to limit this kind of mistake in the future. This is happening to me after trading for over 20 years, so it can easily happen to someone who is just beginning as a trader.
Do not expect to be right all of the time. Success is about what you do when you are wrong, how you handle a loss. If the market tells you that your trading idea is wrong, listen and react accordingly. Usually, the best way to deal with being wrong is locking in the loss and moving on. However, before moving on, make sure you learn the lesson that the market has given you.Back To Top
May has often been referred to as the month when it is best to go away from the market as the strongest six months of the year comes to an end. According to the Stock Trader's Almanac, May was down 15 out of 20 months from 1965 to 1984 but then did well from 1985 to 1997 with 13 straight gains. Since then, May has been up 7 and down 5 months. Since 1951, pre presidential election year Mays rank poorly as the #10 month for the Dow and S&P and #8 for the Nasdaq.
Thus far, May has been a rough month for traders as emotionally priced commodity stocks have lead the market downward. What should we be doing during this corrective process?
First, realize that the selling pressure we have seen recently has not broken the bull market trend. Prices had run away to the upside and the market was due for a pull back. Thus far, that is all this round of selling pressure has been. This does not mean that we won't see a break of the upward trend line in the future, but a break is not probable.
I do expect that we will see a generally sideways market for the next few months with a narrowing trading range as time passes. This means we have to focus our trades on stocks moving on their own story or in sectors that are outperforming the market.
Right now, Consumer Staples is a strong sector. Two weeks ago, I featured two Consumer Staples stocks (DF and SMBL) and both of those stocks have done well while the market has gone lower. DF was the top performing stock in the S&P 500 this past week. This shows the importance of picking stocks within a strong sector.
I like to buy strength but not chase emotion. This means finding stocks that are doing well but have only just started doing well. Essentially, find stocks in the very early stages of what could be a lasting upward trend.
This week, I focused on the S&P 500 stocks, looking for the companies that went up this week but which have been boring up until now. Breakouts from low price volatility.
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1. M
Macy's (M) announced better than expected earnings this week and broke out of an ascending triangle pattern that had been building for over a year. This chart set up is suitable for a longer term trader looking for a trade that could last over a year. With support at $24 and resistance at $45, there is about four times more upside potential than downside risk.
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2. DPS
US Beverage was the fourth best performing sector this week. Dr Pepper (DPS) managed to break through the $40 resistance line that has held it back all year, out of a cup and handle pattern. The stock now looks like it can begin to catch up to Coke (KO) and Pepsi (PEP) which have been doing well for a number of weeks. Support at $38.90.
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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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