Finding Emotional Leverage
Stockscores.com Perspectives for the week ending December 10, 2004
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In this week's issue:
There is a constant argument between technical and fundamental analysts about what research method is better. While I side with those who read stock charts to predict where prices are going, I also know that there are people who are very good at predicting future fundamentals, and therefore, that method works best for them. However, this whole argument misses the point.
Success in the stock market is not about knowing when to buy and sell. It is about doing it with discipline.
When it comes to our money, most of us are emotional. We fear losing money and are eager to make money. We can put a lot of effort in to learning how to know when to buy and sell stocks and devise a set of rules for doing so. Yet, many people fail to put good trading methodologies to work because they simply break their own rules.
The problem is discipline, and part of the reason that we don't trade with discipline is because there is no one punishing us if we break our rules. I think a lot of good stock market analysts would be great traders if there was someone hovering over them with a baseball bat. Break the rules, you meet Mr. Pine.
Consider someone who plays a car racing video game. They probably crash every 30 seconds in the game because there is no pain for doing so. They would never crash their own car that often simply because they don't take the same chances in real life that they take in the game.
Traders take chances that they shouldn't because they don't see the risk in such an obvious way as a driver who goes 120 miles an hour down a crowded city street. Yet failing to use stop losses, taking questionable trades, chasing stock higher or entering positions with too much risk are all mistakes that are likely to lead to pain. To stop making these kinds of mistakes, we first need to understand that they are mistakes, and then we need to get leverage on ourselves to encourage discipline.
I have started to make deals with myself to encourage my own discipline in trading. If I break one of my rules, I have to get down and do 30 push ups. Sound stupid? The first day I started doing it this week, I did quite a few push ups. The next four days I did very few, and I also had very few losing trades.
If you are having trouble trading with discipline, you need to find a way to get leverage on your emotions. Perhaps have your spouse check all your trades, going through them to see that you satisfied all your trading rules. If not, then grab the toilet brush, you have work to do.
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Companies that announce major news after the close of trading will often gap up in price the following day. An upward price gap occurs when the low of the current trading day is higher than the previous day's high. This abnormal price activity is useful because it indicates that the stock is trading more on its own story and less on the general movements of the market.
The Gap Ups strategy seeks stocks that are gapping upward on abnormal volume from low price volatility. Adding in these extra criteria improves the probability of picking a stock that is likely to go in to an up trend in the future. By focusing on stocks with low price volatility before the gap, we focus on stocks that were truly surprised by whatever motivated the price gap. Since the market's psychology is shaped by the past performance of the stock, price gaps tend to influence the market's mood favorably, and create optimism. This optimism can lead to a further price appreciation.
However, stocks that gap up often have to take a rest before they try to go in to an up trend. The sudden move to the upside is met with selling pressure as some investors happily sell at a profit, without regard for where the stock may be going in the future. When faced with fast money, many investors take their profit and run.
Therefore, it is often better to wait for entry in to a stock that gaps up in price. After the gap up, patience for a subsequent close above the gap day high can improve the probability of success again. Of course, having this patience can also mean paying a higher price, or being left without a position in a strong stock.
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1. FNSR
Today, FNSR is breaking from a cup and handle pattern, through resistance with very abnormal volume. This kind of chart set up indicates that the market is excited about something that the company is doing, and that could be a motivation for a longer term up trend. I think it is important that the stock hold support at $1.70, and I think that this stock could see $3 in the next three months.
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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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