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Monday, June 14, 2004
Good evening friends,
Market Recap
With the market taking a dive at the open and continuing its decline for the rest of the day, it was not nice to start our trading week. The Dow lost -75 points and the NASDAQ was down -29 points. The trading channel on the NASDAQ continues to be the problem for this index.
Both the Dow and the NASDAQ charts still look decent, even after today's selling. The NASDAQ dipped slightly below its 200 SMA intraday but managed to close above it. We will stay positive until there is a close below the 200 SMA; then we turn negative in a hurry. A close below the 200 SMA may indicate a return to the bottom of this trading channel (see my last chart of the NASDAQ to view this channel).
The Dow remains above its short term 9 EMA, and looks better for now. However, the market still lacks direction so we will proceed with caution. Economic numbers out this week may determine direction. Hedge your long positions with a few short positions or stay in cash until a clear direction can be determined.
The Losing Trades
We talk a lot about are winning trades but we do not talk much about the losers. One reason is that our losers are few and far between. I am not talking about our trades with 2-3% losses. By trading properly, you will have a many trades with 2-3% losses. With strict money management, it is part of trading since not all trades will be winners. In a tough market like this, we preserve capital by cutting losses early.
One trade with a gain of 10% (like IPIX today) equals five losses of 2% each. With more winners than losers, we will make money if we cut the losses early and stick to our tight stop rules.
Tonight I am talking about the big losers we have had, 10% or more (the ones that got away). These losses are unacceptable and should not happen if you are a disciplined trader. The losers I am specifically talking about are TPPP, SNTK, AMWS, IPVO, and TINY. TINY was sold today for a 32% loss. This is an unacceptable loss no matter the situation. I still hold the others, but no one should still be holding any of these stocks if you are following the rules and cutting your losses. I still have them because I was either not able to send an Alert when they dropped, or there was not enough volume to sell on the day I wanted to sell. I will eventually sell them all but I will pick and choose when in order to get the best price.
Sometimes we get stuck in holding a position. It does not happen often, but when it does, we have a decision to make: hold or take the loss. It is like going to the dentist, we do not like to go, but we know we should. It is a necessary evil that we need to endure. Likewise, our portfolios need to be cleaned as well. We need to weed out the losing positions to free up cash and prepare our portfolios for the next trade. We must do this in order to survive to trade another day.
Losses happen, even the best professional traders lose. If you never clean up your portfolio chances are the positions will only get worse and worse. I am in the process of cleaning up ours now. TINY is the first to go, the others will go in due time. Some of these stocks have been putting in a good base and may turn out to be the bottom. I do not want to sell at the bottom if I do not have to. We may get lucky and get a news release that pops any of these stocks up. For example, IPVO was up 10% today. You just never know when a surge will come.
Comparing Past Trades
Holding stocks that go down is not something I like to do, but looking at the big picture we have had very few losers over 10% compared to the number of winning trades we have made or the number of total trades we have had. To date we have made 547 trades in just over a year: 272 trades in the first 6 months of 2004 and 275 trades in the last 7 months of 2003.
On a relative basis, these 5 losers total less than 1% of our total trades and more important, equal less than 1% of our total losses. I am not trying to justify these losers, I am just making the point that no trader is immune to losing, it happens to all of us. But if you limit the losses, over time your profits will add up. Also if by chance you do get stuck in some losing trades, as long as you only put 5% of your portfolio balance in each trade, you cannot get hurt. This is what I mean by strict money management.
To Wrap Up
We have talked about spring cleaning of the portfolio in recent months. It is a task that many people have a very hard time doing. You have bought a stock and it has dropped. But rather than closing the position, you cling to it, expecting that one day it will go back up, letting you exit with less of a loss. However, it just continues to go down. It happened to me on the above trades, it happens to all of us. I try to keep my portfolio as clean as possible; then I'll have cash ready to take positions in stocks that are moving.
Occasionally we do get stuck in a losing stock, and it is just not worth selling it, or the volume has dried up so much that we simply can not sell it. But for the most part, I try to practice good portfolio hygiene. The point is, try to never be in this position, if a stocks starts breaking down, sell it, and take the small loss before it gets much bigger. Get rid of the bad trades quickly and stick to the 5% rule, or your whole portfolio can end up rotting away on you faster than you would believe.
No New Stocks in Bulletin
Because of the negative market action today, there will be no new stocks tonight. The following stocks are a few that I may add to the Bulletin later this week:
- GT (long)
- GRA (long)
- TUNE (long)
- COCO (short)
As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
OTC BB Watch List
- None
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