Take Money Out of the Decision
Stockscores.com Perspectives for the week ending December 2, 2011
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In this week's issue:
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What are your motivations for trading the stock market? If you a relatively normal person then it is likely that you trade to make money. However, I have found that trading to make money is dangerous because of the emotional attachment we have to our cash. The best traders have different motivations.
Consider something as simple as crossing the road. What do you think about when crossing a busy street? Are you solely motivated to achieve the obvious goal of getting to the other side? Not likely. You are probably thinking a lot about getting to the other side without getting run over.
While this seems obviously silly, the correlation that can be made to trading demonstrates an important point. When we focus on money, when we are motivated by greed, we tend to ignore the obvious. If you are trading to make money then a number of psychological problems enter the trading decision.
First, we worry about missing out on an opportunity. We may look at a trade and think that it is not ideal but still "pretty good". We remember the last "pretty good" trade set up that came along and how it did really well. We remember the pain that we associate with missing out on that pretty good trade set up that we ignored and that motivates us to take this trade, even though it is less than ideal.
Would you cross a busy road if you had a "pretty good" chance of making it without being hit? Would you jump out of an airplane if there was a "pretty good chance" that your parachute would open?
Second, when our trading decisions are motivated solely by money, we tend to work very hard to find something to trade. While a good work ethic is important to be successful in life, working hard to identify opportunities in the stock market is not always good. Doing so means we work hard to find things that are not obvious, and therefore, may not be good enough to even be worth trading. I find that my very best trades are the ones that I don't have to think twice about, those that jump off my trading screen when the stock is in front of me. I don't work hard to find them, they find me.
Third, when we trade just to make money we tend to sell our winners too soon. We want to lock in that good feeling of making a profit and don't want to ever feel the frustration of having a winner turn in to a loser. So, we exit the stock when it feels good or at the first sign that the trade might make us feel bad. This causes us to not ride out the inevitable pull backs along a longer term trend.
Finally, focusing on the money causes us to now manage risk effectively. When we think about how much we "could" make if the stock goes up then we might buy a position larger than we are willing to lose. By taking too much risk, we are more likely to not sell our losers when they reach a sell signal or exit our winners too soon because of the fear that the winner will turn in to a loser.
Rather than focus on money when you trade, I want you to focus on being right. Do your analysis on a stock and then ask, "am I right to buy this stock?" "Am I right to short sell this stock?"
Make your trading an intellectual exercise, a challenge to your brain to be right more than you are wrong. Take your focus off of the green and on to the black and white. The easiest way to do this is to only look at the charts and not look at your account's profit and loss indicator. I strongly believe that if you focus on making the right decision instead of focusing on making money, you will end up making more of it anyway.
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I think the market is more likely to go lower than higher next week, so any buying of stocks should be done with caution. The list of stocks that the Stockscores Simple Market Scan strategy finds is getting longer, a sign that conditions are improving. However, the market remains in a bearish trend.
This week, I ran the Stockscores Simple Market Scan and went through the chart results looking for optimistic chart patterns. Here are a couple of stocks that have good looking chart patterns and should do well, as long as the overall market does not overwhelm them to the downside:
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1. SLTM
SLTM is a Bottom Fishing chart pattern set up with a recent break of the downward trend and now a break higher from a rising bottom. Wait to see how the market performs on Monday as it could break down after the good strength this past week. Support at $2.05.
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2. AIS
AIS made its breakout a few weeks ago and then consolidated in a flag pattern. The stock broke out of that on Friday, a good signal that the stock wants to go higher despite the market's uncertainty. I consider this more of a swing trade because the stock has been trending higher for some time already. Support at $2.55.
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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.
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