Trading Problems and Solutions
Stockscores.com Perspectives for the week ending February 2, 2016
In this week's issue:
In This Week's Issue:
- Stockscores' Market Minutes Video - Traders Must Be Patient with Winners
- Stockscores Trader Training - Trading Problems and Solutions
- Stock Features of the Week - A Day Trader's Market
Stockscores Market Minutes Video - Traders Must Be Patient with Winners
Having patience with your winning trades as long as the trade is working has a huge impact on your overall profitability. This week, I discuss this topic as well as do my regular weekly market analysis.Click Here to Watch
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Trader Training - Trading Problems and Solutions
Stock trading is simple, but not easy. As long as we are normal, emotional human beings, we will make mistakes in the application of our trading plans. Countless hours can be spent developing the rules for a profitable trading strategy but, unless there is absolute discipline in applying that strategy, results can be poor.
Each week, sometimes even each night, I review the trades that I should have taken if I had been perfect in the execution of my trading strategy. While I don't expect to be a perfect trader, I do think I can learn a lot by doing this regular analysis.
I create a list of all of the stocks that met my strategy rules and calculate what the profits should have been. I then compare these trades to what I actually did and work on understanding what caused the differences. I miss some trades, I pass on others and often, I don't exit using my rules. With my regular analysis, I try to understand why.
Here are the typical causes for my mistakes:
Lack of Confidence - if market conditions are not strong, the number of losers tends to rise while the profit per trade falls. After an extended period of trading weakness, lower success starts to hurt confidence. This can easily lead to breaking of rules as faith in the rules deteriorates.
Lack of Focus - you can apply the strategy rules and processes the same way every day but get a very different number of trading opportunities. We don't control what the market does and we should not expect there to be a constant flow of trades. When markets get quiet, it is easy to lose focus which often leads to missing a good trade
Fear - the fear of missing out will cause us to take a trade that does not fit all of our rules. The fear of loss will cause us to pass on a trade that does. For most people, fear is the most common source of trading errors.
Greed - you can be in a trade that is working and start thinking about how great it will be if that trade delivers a big profit. You start to focus on the money instead of the market's message. When an exit signal comes, you ignore it because you are focused on the dream of big profits that has been playing in your head.
Tools - it is not enough to find a good stock to trade, you also have to find it at the right time. Timing is everything and that requires tools that allow you to see the trade before the expected outcome has happened. Good tools cost money but they can also deliver bigger profits.
Speed of Execution - this source of error is more for day traders who can be dinosaurs on a trade if they miss the entry point by even a couple of minutes. An entry point that is missed by just a big can have a big impact on the reward for risk of the trade.
Slippage - the difference between the bid and the ask is called the spread. A stock that has buyers at $9 and sellers at $9.10 has a $0.10 spread. If your strategy makes small profits, the spread can eat up a lot of the gain. The tighter the spread between the bid and the ask, the lower the slippage.
These are not all the sources of errors but some for you to be conscious of. Now, some solutions:
Lack of Confidence - test your strategies on a regular basis so you believe in your rules. Make sure you do your test over a large sample size and without bias in the testing process so you can truly believe that your strategy works.
Lack of Focus - establish a routine to apply your research and execution processes so that you don't miss out. If you are a longer term investor, set aside 20 minutes each week to manage your portfolio. If you are a day trader, create a schedule of what you will do through each trading day.
Fear - think in terms of probability, not possibility. Yes, that stock that is going up in to resistance could rocket higher but, since there is strong resistance, it probably won't. Write down the rules of your strategies in a trading plan and make a check list for every trade you make to ensure you are sticking to your rules.
Greed - remind yourself that the market provides opportunity constantly. You do not have to be a perfect trader to make money, you just have to apply a strategy that works and do it consistently. Don't focus on what you make on the current trade you are in, think in terms of how well you do over a large number of trades.
Tools - define what you need to find stocks that fit your criteria and then go out and find the tools that satisfy your needs. Don't be afraid to consider tools that have a higher cost, they may also help you make more profits. When considering tools, think about value rather than price.
Speed of Execution - don't apply strategies that require a speed of execution that does not suit your trading acumen or your brokerage's capability. If you need more time to analyze, focus on strategies that are longer term and less time sensitive.
Slippage - if your strategy operates on thinner margins where the slippage can make or break the performance of the strategy, focus on stocks that have higher liquidity. The more actively a stock trades, the tighter the spread and the less slippage you will feel.
Trading well is more about mastery of self than it is mastery of the market. Once you have a strategy that is effective, spend more time working on your execution than on fine tuning the rules of the strategy.
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The market continues to have abnormal price volatility with not much of a consistent trend. Uncertainty is high making it a poor environment for trading unless you are very short term oriented. Great time to be a day trader but for a hold period any longer, it is difficult to succeed. I recommend longer term traders sit on cash right now and wait. Great opportunities usually follow corrective periods.Back To Top
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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