Maintain a High Trading Standard
Stockscores.com Perspectives for the week ending June 3, 2013
In this week's issue:
This week's Market Minutes video provides analysis on the overall market plus some tips for how to evaluate trades. Watch it on YouTube by clicking here.
This Week's Trading Lesson
There are approximately 15,000 actively traded stocks on the major North American stock markets. That gives investors looking for a stock to trade a lot of choices. Good traders respond to these varied alternatives by being selective and taking the best of the best. Struggling traders end up taking marginal opportunities that may not have a high probability of success. What causes traders to trade marginal opportunities?
Most trading mistakes come down to one of three things:
lack of trading knowledge
succumbing to fear
succumbing to greed
An experienced, well trained trader should know how to trade and identify good opportunities. Despite their knowledge and skill, many of these traders still take marginal trades because of one of the other two mistakes. Simply put, they are afraid that they will miss out on something good.
Most traders can remember a time when they thought about entering a trade but decided not to because the set up was less than ideal. What makes the memory stick is when that trade turns out to be a great money maker. Being left on the curb as the bus is leaving the station on its way to Profit City is frustrating.
The next time a marginal trading opportunity comes along, we decide to take the trade. Essentially, we are reacting to our painful memory of missing out on the previous marginal trade that proved to be successful.
We are afraid of missing out, and are eager to make money. Blinded by fear and greed.
A marginal trade is marginal because it has a lower probability of success. Keep in mind that the nature of probability is that there will be instances when the low probability outcome occurs rather than the high probability outcome. Otherwise, we would be talking about certainty and not probability.
If you are looking at a marginal trade, it probably means that the expected potential for profit is less than 60%. That means that the trade will work some of the time. The problem is that we remember those times that it did work and take the trade the next time a similar set up occurs. But, because probability is not on our side, that reactionary trading decision often leads to a loss.
The real problem comes when our losses affect our confidence. With the losing trade fresh in our mind we tend to shy away from high probability trades because we are afraid of losing again. The problem is not the quality of the trade that we are considering but our conditioned response to risk as a result of taking a marginal trade.
Any time I have a streak of losers I find that I almost always have taken some marginal trades, those that do not quite fit my trading criteria. When I go back and analyze these trades I realize that the problem is not in my rules but the undisciplined application of my trading rules. By getting back to disciplined trading I almost always reverse my losing streak.
Our brains are wired to remember pain. The pain of missing out on a good trade can lead us to take a marginal trade. What good traders remember is that there are a lot of busses leaving the station. By sticking to their disciplined trading approach, good traders will find the high probability trades that provide some nice rides and for those marginal money makers that we miss, remember that there is always another bus.
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Today I ran the Abnormal Breaks Market Scan for the US and Canada and found one stock that has a good weekly chart. See below:Back To Top
1. CHTP
I featured CHTP for the readers of my daily newsletter earlier in the day on Monday as it was moving out of a predictive chart pattern early in the day with abnormal trading volume. The long term outlook for the stock is good as it breaking from a cup and handle pattern on the weekly. Support at $1.85.
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References
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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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