Mental Management
Stockscores.com Perspectives for the week ending November 19, 2004
|
| Upcoming Events |
StockSchool Pro Refresher
If you have taken the StockSchool course in the past, and would like to sharpen your trading skills, consider the StockSchool Pro Refresher course in Calgary on November 27. There are only five spots left for the Calgary course. Email tyler@stockscores.com for more information. Vancouver date to be announced next week.
|
|
In this week's issue:
Emotion is the enemy of the trader. Without emotion, stock trading is simple. Throw in some mental breakdowns, and trading can be the most frustrating occupation imaginable. What separates good traders from great traders is the ability to control emotions. Keep emotion out of your trading, and you can make a lot of money in the market.
Emotion will affect how you enter and exit a trade. By looking at the emotional factors that cause errors in trade execution, we can consider some remedies.
Problem: Enter Trades That Are Not Ideal
A well trained trader will know what makes a trade worth taking. Yet, in the heat of the market action, many traders take trades that they would never consider in the absence of emotion. The excitement of trading lures them in to marginal trades.
Remedy
Better preparation will lead to better trades. By creating a trading plan, writing it down, and preparing a checklist, you take away some of the uncertainty in executing your trades. When considering a stock, it is helpful to have a list of your rules that you can quickly go through to make sure you are not making an impulsive decision, but rather, one that is based on your sound trading theory.
Problem: Taking Too Much Risk
Many traders will take a position without considering the downside potential for the stock and what loss exposure that creates. Instead, they focus on the upside potential, and in the excitement of the dream, take a position size that is too risky. When the trader sees the risk exposure, they become fearful and don't properly execute the trade.
Remedy
The less you care about a trade, the more likely you are to follow your trading rules and be disciplined. Fear takes a greater role in your decision making when you take on a lot of risk, so only take a position size that you are comfortable with. As you gain confidence, you can increase your risk exposure because you will have a greater comfort level. However, every trade should have no more risk than you are comfortable with. If you feel too much pain, you will get emotional.
Problem: Failing to Sell Losers
A well trained trader knows that it is essential to minimize losses, yet so many traders break the cardinal rule of trading, and let small losses grow in to bigger ones. To be a good trader, we have to limit our downside losses and not hang on to stocks that are going against us. However, when we are faced with a loser, we somehow find justification for hanging on to it.
Remedy
You have to take the emotion out of the selling decision, so plan your stop loss point before you enter the trade. You have an emotional attachment to stocks you own, so planning your loss limit before you take a position will allow you to make a more lucid decision. Then, force yourself to have the discipline to exit when the stock gets to your loss limit. If you have to encourage discipline with an automated stop loss order, then do so.
Problem: Failing to Hold Winners
It is very hard to hold on to a profitable position when it starts to pull back. We see paper profits start to be lost, and we panic and sell out. While we know that minor pull backs are part of longer term up trends, we tend to sell too early.
Remedy
We have to take the emotion out of ownership. One thing we must not do is watch the scoreboard. If we can see what our profit is in dollar terms, then we are more likely to sell early when that profit figure drops a little bit. What the trader is up or down on a trade is totally irrelevant to the exit decision. Make an exit decision based on the chart. However, the more closely we watch a chart, the more emotional we will get. The gyrations of the market can hypnotize you in to making a bad decision, so don't watch stocks that you own too closely. If you enter a day trade and will exit based on the signals from a five minute candlestick chart, then you really only need to look at the chart every five minutes. Any closer analysis will likely lead to an emotional mistake. Don't watch the stock or the profit and loss to closely.
Stock trading is simple. Managing emotions is hard. I think that a person who works hard can learn the rules of trading in a few months, but it can take years to learn how to manage emotions. When you are analyzing your trading success, be careful not to blame the rules for your failure when the cause is really your emotions. To achieve success, traders must focus on the true source of their mistakes and constantly work to improve.
Back To Top
Trading on Friday brought a negative short term signal for the overall market. The upward trendline, which has held up for about a month, was broken. And so, while I think the market is heading higher in the longer term, I also believe that we are likely to see some short term weakness. There are a lot of traders with nice profits since the election who will take some money off of the table here.
Based on that, I ran the Rolling Over Market Scan strategy. I believe it will generate some good opportunities for stocks that we can short sell with an anticipated hold period of 3 - 7 days.
Pessimism is best represented on a stock chart by falling tops. Falling tops indicate that, over time, sellers are gaining strength and buyers are losing their motivation. When stocks consolidate with falling tops, the pessimism is complemented by growing consensus on what the stock is worth. As a market comes to consensus above a support price, a potential trading opportunity takes shape.
We get a signal that the bears have taken hold of a stock when three phases have run their course.
The upward trend line has been broken
A price consolidation has evolved, preferably with a falling top signaling pessimism.
A penetration of support occurs.
A good short selling opportunity occurs when these three criteria appear, particularly on stocks that have made considerable price gains in the most recent three to six months. As traders take profits off of the table, and fear begins to build among owners of the stock, the downward momentum in the stock can increase, creating a profitable trade for the short seller that established a position on the breakdown.
I ran this market scan, and found three stocks that I think have good potential for some short term weakness. Consider these for short sell trades in the next week:
Back To Top
1. COST
COST has broken down through support on the daily, and is likely to fall back as investors take profits from a good 7 week up trend. This is not a super volatile stock, so traders may have more fun with buying a Put option than actually shorting the stock. There is some short term support at $47.50 on the intraday chart, I would think that the stock may hold above that for a couple of days, but a break through this price point is likely to telegraph a further move to the downside.
Back To Top
2. JUPM
JUPM broke through support on Friday and fell quite dramatically. I think we could see a bit of a bounce back early next week, but I would consider that a short selling opportunity as the bias is likely down as we look out 3 to 7 days. A move back above $19 would reverse the negative signal that the market gave on Friday.
Back To Top
3. MNST
MNST is just tickling through support now, and looks like it will break down if there is more market weakness next week. Good chance the stock will at least fill in the gap that was made in mid October, but could fall to $24 if the market pull back has any legs.
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.
Back To Top
|
