All Entries in the "Trading Psychology" Category
Just Buy Something!
July 12, 2007 at 7:42 pm
Huge up days in the market like today have amazing power. Ordinary investors love them, because everything they own goes up. Traders sometimes hate them though, because underperformance can be common.
It almost never fails that on days when the market makes a giant move, my friends or family will inquire about how great my day was. It isn’t always what they might think. Maybe you’ve had similar experiences. Some of the best days even come when “the market” does very little, which is funny. But back to the topic….
Days of big point gains leave underperforming traders feeling like they need to JUST BUY SOMETHING so that they can participate in the move. That’s not always the solution, because if you’re a disciplined trader there are certainly days when the stocks you look at for possible trades simply don’t fit your criteria. So if you happen to underperform on a day like today, consider a couple of concepts which may help you get beyond the frustration of “missing out.”
* Walk away. It’s a choice each of us have as traders. Just shut down the PC and get out of your chair. Some days you don’t have it, so don’t force it if that’s the case. Maybe it’s you, or maybe it’s the market, but either way the bottom line is you’re not making bank. Come back and fight another day.
* Trade ETF’s. Sure they move slower than many of the high-beta names you might prefer to trade, but they are a definite solution that allows you to participate directly in large market moves. You can leverage up to offset the slower percentage moves, plus they’re liquid as can be so that makes them easy to jump into and out of.
* Be confident in tomorrow. I’ve had some great days right after major market advances like today. It’s funny, but I don’t really trade the mega-cap Dow components like many of which were leaders today. I like to trade lots of secondary stocks, and on days like today those are often an afterthought. Often times the following day, the mega-caps will cool off but traders are still just as eager to buy something. They turn to the secondary stocks, and that’s when you can knock out some nice gains.
Trade well Friday and enjoy your weekend!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
U.S. Open Golf Can Help Your Trading
June 16, 2007 at 10:55 pm
Last year during this same time I wrote a series on Trading and Golf to outline a number of lessons between the two games (yes, trading is a game!). So with the U.S. Open final round set to air tomorrow afternoon, no doubt it will take center stage for a great number of traders. There are a lot of similarities found when comparing the pressures of trading with the challenges golf brings, so be sure to check out some of last year’s posts (there are 18 total posts but most are brief).
And of course, to those of you who are Dads, Happy Father’s Day!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Golf, U.S. Open, Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Dip-Buyer Domination
April 20, 2007 at 10:36 am
The DJIA is going for its 15th up day in the last 16 sessions. That’s only 1 losing day in the last 3+ weeks! Have we seen pullbacks? Sure, but they’ve remained very shallow thanks to one phenomenon:
Dip-Buyer Domination.
There seems to have been an amazing amount of cash sitting on the sidelines just itching for virtually any downtick to put it to work in recent weeks. This has kept the market climbing steadily, while simultaneously preventing pullbacks from showing any follow through. As a result, the dip-buyers just have a ton of confidence and they will continue to do their thing until it stops working.
This morning, however, we have a sizeable upside gap which has potential to change things (at least temporarily). After a huge run recently, the market is now up far enough to finally entice some profit-taking. Those who have been buying every dip now have a possible exhaustion gap which is tempting the bulls to line their wallets and book recent gains, and who could blame them?
Technically, this is a good thing. Markets don’t move in straight lines for very long, few would argue that. But the indexes are now up far enough from their uptrend lines to allow them some room to retrace without disturbing the uptrend. That means a breather could set in without panic, and that would be very healthy for this market whether you’re a bull or a bear.
Here’s a look at the DJIA as an example:
(Click for full size.) Chart Courtesy of TeleChart.
Although the odds of a rest have improved after this morning’s gap, don’t be in a big hurry to short sell, because the dip-buyers aren’t likely to run away quickly.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Honor Thy Stop
April 17, 2007 at 11:57 am
There are a handful of trading books which I have read many times and keep returning to on occasion, including Reminiscences of a Stock Operator, and the Market Wizards series by Jack Schwager. I would also recommend one other book which is written by a Market Wizard, Marty Schwartz, which is called Pit Bull.
Schwartz writes candidly about his history as a trader, including the struggles he went through for many years before becoming one of the biggest and most successful S&P 500 futures traders that has been seen. One portion of Pit Bull is called “Honor Thy Stop,” and it contains some excellent thoughts regarding the use of these safety nets in trading. Here are several of his comments on the topic of stopping out of trades. I found these very useful, so you might relate to them as well. I have a few comments thrown in there too:
“You’re the only one who’s emotionally involved in your position.”
How true! The market really doesn’t care about what we’re feeling, which is all the more reason to approach trades with more logic than emotion.
“Taking a loss is hard to do because it’s an admission that you’ve been wrong. But in the market, being wrong some of the time is part of the game.”
It’s how we manage our wrong trades that will keep us on track.
“That’s the problem with amateurs, they only have half a plan, the easy half. They know how much of a profit they’re willing to take, but they don’t have the foggiest idea how much they’re willing to lose……Their plan for a position that goes south is, “Please God, let me out of this and I’ll never do it again,” but that’s (false), because if by chance the position turns around, they’ll soon forget about God. They’ll go back to thinking that they’re geniuses…”
It is amazing how being on the wrong side makes us repent for all of our trading mistakes, but when we’re right we want all the credit.
“What most people fail to realize is that while you’re losing your money, you’re also losing your objectivity. The market…..doesn’t care about you. That’s why you have to put aside your ego and get out.”
“…a stop is an investment in self-preservation because if you’re wrong, it saves you those extra dollars that you’d lose by hanging on to a losing position. It keeps you from digging the hole deeper and it makes it easier for you to climb back out.”
This is a great way to view the use of stops. They are safety nets for our well-being as traders, so why not use them.
“The more you lose in a trade, the less objective you become. EXITING A LOSING TRADE QUICKLY CLEARS YOUR HEAD AND RESTORES YOUR OBJECTIVITY….. By preserving your capital through the use of a stop, you make it possible to wait patiently for a high-probability trade with a low-risk entry point.”
Of course the market is always there to remind us, but it’s still good to have Schwartz’s input on the subject to remind us that a big part of what made him great was his ability to contain losses when they occurred. In fact, Schwartz even states in the book, “I can tell you how I became a winner – I learned how to lose.”
So the next time you’re faced with the opportunity to honor thy stop, remember the success of Schwartz and know that while you’re admitting defeat on that one trade, you’re simultaneously adding objectivity to your next entry.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Recovering From Losing Trades
April 13, 2007 at 10:02 am
As traders, we all go through stretches which are not-so-fun! But as they say in other realms of life, it’s not how you fall down that counts – it’s how you get back up.
One of my biggest losing trades came in EPIC a few years ago. The stock had some good momentum and lots of activity one particular day, so I bought some for a day trade. I went pretty big to begin with, and the more I watched it the more I liked it. It was moving my direction and I was feeling pretty good, so I added some more. Well, out of nowhere about an hour after my entry the thing went into freefall. Too late to check the news, the damage had been done!
I decided not to panic, and I also decided not to add….2 things I’m very glad about. Anyway, the downside slowed and the stock bounced back slightly, but I still closed it out for what was a big loss to me at the time. I went home that day from the trading office pretty disappointed that the previous couple of weeks’ gains had been wiped away with that one loss. It bruised my ego, dinged my account, and most importantly, it confused me.
Choosing How to Respond
As traders, we can’t control the news flow or what happens to the stocks we’re trading – only how we respond to it. I had gotten into a trade in size which I was confident in, and I got blindsided by an avalanche of selling. Sometimes it’s a headline, sometimes it’s a downgrade or a warning, but it’ll happen from time to time if you trade long enough.
Using Pain As A Positive
After mulling it over for the evening, I finally decided it was an isolated event and out of my control. I also decided the next day to pick up where I had left off 2 days ahead…making money. By the end of that month I had recovered fully and put my account back to new highs, which put my confidence even higher. What had felt like a major negative in the short term, ultimately turned into a great positive and a source of strength going forward. I became a better trader because of it.
So the next time you take a hit that isn’t the result of a poor decision or blowing your stop, don’t freak out. Don’t add just because you’re down. And don’t decide you’re a bad trader! DO look for a good spot to exit, take your medicine and clear your screen. It’ll help you clear your head, and you can come back when you’re ready to resume with the right mentality.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Gap Lessons: When Trades Get Lucky
April 10, 2007 at 9:21 am
I’ll never forget when it happened. I had been swing trading the stock regularly, and it had been very good to me in the weeks leading up to the big gap. I was sticking and moving, making a few points here and there, and my account was getting bigger because of it.
And then came January 3rd, 2000. Emulex (ELX) gapped up a whopping 47.5%. It was completely huge, and I was stunned. I had never caught a gap so large, and I was instantly frozen in disbelief and excitement. “This stock is headed to the moon, and today must be the day,” I thought.
Or was it??
Soon after it opened, it marked the high of the session roughly up $29 (just about $2 higher than the opening level), and soon worked its way lower to finish positive by only about $7. BUT, I got lucky three times that day…
The first way I was lucky was that it gapped higher to begin with.
The second way I was lucky was that I panicked and sold after it started falling like a rock, getting out well above the closing price.
The third way I was lucky was that I learned a valuable lesson: TAKE THE MARKET’S GIFTS!
Times Have Changed – Slightly
The gaps aren’t as big these days because the market’s not as volatile, but gifts still come from the market and you just might get one if you’re lucky. When it happens for you, keep a couple of things in mind:
* It’s alright to sell at least SOME of your shares. Too many investors and traders think they must be in a full position or close the trade completely. But with commissions so inexpensive these days, it can really pay to make partial sales and pay the commissions for multiple exits. Why not lighten up your exposure and make some of those gains real?
* The professionals are probably selling. Market makers and fund traders love to flip shares into strength, knowing they will be able to reload at lower prices after the euphoria wears off and the little guys stop buying. They are the big dogs that can really move the markets, so follow their lead and use your agility to book profits when the getting is good.
* Regret is a loser’s game. Too many individual investors and traders see a big gain start to disappear, and they quickly resolve to exit the trade once it returns to its high-water mark. When it continues to sink lower and lower, regret sets in like a millstone around their necks and prevents them from bailing out while they still can. Don’t let regret dictate your decisions. Use your head – making logical decisions under the gun can mean the difference between failure and survival in the market, so don’t get greedy or you’ll regret it. The idea is to compound your money, not your mistakes!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
The Difference Between Predicting & Anticipating
March 8, 2007 at 10:30 am
This column was originally published Wednesday for members at TheStockBandit.com. It’s being republished here as a bonus for TheStockBandit.net readers. For more information on subscribing to TheStockBandit.com, please check out our stock pick service.
As thrilling as it may be to predict a market move correctly, actually pulling it off is more about luck than anything. I always try to avoid making predictions in the market, because they skew my vision with a bias – which means they serve no purpose in my trading.
Predictions are often grand proclamations of what is going to happen, and they usually include details about even how events will unfold. With anything possible in the stock market at all times, it’s an appealing place for predictors to surface because they may just be right and be able to garner the glory that might come with it. Predictions tend to be stubborn, brash and unyielding, leaving no margin for error or revisions.
Anticipations might be described more as hunches, or gut feelings of what may happen. They usually involve a fair assessment of current conditions, and are based on how the current conditions are most likely to continue to develop. Anticipations help to serve more of an if/then type of role, and they allow for adjustments in a trading plan.
I don’t like to “hunt” for particular types of plays when I flip through my watch lists. Instead, I generally prefer to let the charts dictate my moves. If there are lots of bullish setups, I’ll end up net long. If there are lots of bearish setups, I’ll end up net short. On occasion though, when something drastic takes place in the market, I will let my trading experience guide me a little more and let that gut feel play a larger role in what my trading plans will involve.
This is of particular relevance right now, as I am not predicting another leg down but I am anticipating one. My anticipation right now is that the market bounce could last for a few days before another leg down begins, but I do anticipate seeing more downside based on the severity of the drop we saw last week. When the character changes so abruptly and so decisively, it usually isn’t an anomoly. Another wave of selling is likely, and there are numerous reasons (broken support levels, high volume declines vs. low-volume bounces, trapped bulls wanting out, etc.). Because of this, I’m anticipating some short setups to emerge for swing trading, so I am “hunting” for them more than I typically would.
The good news that comes with anticipating another move down is that the setups will have to prove themselves to warrant an entry. Rising trend lines and support levels will be required to break in order to trigger a trade entry for me. So at this point, anticipating another move down doesn’t back me into a corner. It allows room for an alternate trading plan, whereas predicting another leg lower skews my view and offers no flexibility.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
