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Monday, February 21, 2005
Market Recap
The Dow closed higher by 30 points Friday on super strong volume. I thought the volume Friday was very impressive and this index could be on its way to making a second attempt to break through that possible double top formation we spoke of last week and into new highs. I have a chart for you tonight with an update on this possible double top. The S&P was up fractionally and has almost the same double top pattern as the Dow does. I think in time both these indices will bust through those tops and make new highs and when this occurs, you better get long quick for the next market move that is bound to bring the under performing NASDAQ along for the ride. The struggling NASDAQ is still below its 50 SMA and has big resistance near 2100. It needs to climb above 2100 to be considered a technical buy point.
Let the Market Dictate Your Trading Style
There are many different types of traders in the market. What I want to encourage everyone to do is to dig down deep and study yourself. Find out what type of trader you are and adjust your trading style to fit the type of trader you are. There are many styles of trading but some styles do not fit certain markets. For instance, if your style does not fit the current market, you must either adjust your style or not trade until the market favors your style. Some traders have two styles or maybe even three styles. This works great if you limit these styles to separate accounts and do not mix them. If you try to have a few different styles of trading in the same account, it will be very difficult for you to separate the trades for each style. If you have only one account, I suggest you decide what type of trader you are and limit that style to that particular account. This is not to say that you cannot be flexible and adjust your style when the market does not favor your style. I adjust my style depending on the market, but I only trade that particular style in one account. If adjustments need to be made, I make them and then I stick to them until the market dictates my style needs to change again.
Tonight I want to focus on two types of traders that I hope we do not have at StockTradersHQ and if we do, I want to help you over come these bad habits. They are the Gambler and the Nervous Nellie or (scared loser) as I like to call them.
The Nervous Nellie
We have had a lot of past members that were Nervous Nellies. They come and go very quickly, never really giving themselves a chance to learn our system. They sign up and immediately start buying everything on the bulletin without reading the “how to use the bulletin” link. As soon as something begins to decline, they are all over the message board. Or they buy something we alerted and when it does not shoot up right away, they ask “XYZ is down 3 cents, should I sell?” The stock may be down by a few pennies, but the chart is perfect and the decline is on such low volume that it is a non issue. Yet, they have not read through all the links in the left column of our site, to understand why we made the trade or our style of trading. They get frustrated and sell for a loss only to see the stock bounce off a moving average or a support level we are tracking and go up the following day. This leads to more frustration and they will likely chase the stock in an attempt to get back in. These bad strategies lead to more losses and even greater frustration.
If you find yourself making excuses for trading, or find yourself chasing stocks that you recently exited, you should take a break and evaluate yourself and your trading habits. If you can overcome the need to trade, you will learn that sitting on cash can sometimes be the smartest move you can make. Live today to trade tomorrow. If you are a nervous trader, you need to identify yourself or you will never be able to fix the problem. Do not rush the trade or it will almost always turn out to be a loser.
The Gambler
For some, trading is an addiction. Just like the gambler, he does it just for the excitement no matter what the market conditions are. If you find yourself trading, or attempting to trade, just for the sake of doing it, you are addicted. This is a serious mental illness that needs to be addressed. If you have been just itching to click the ‘buy' button, no matter how bad the markets are that day, you may be addicted to trading. If you sit in front of you monitor and buy every stock when you hear a news release, you may be addicted
Many traders come into the market and gamble, they do not protect their capital and they are washed out and go broke in there first year of trading. If you take gambles and unnecessary risks, you will be wiped out unless you get lucky and hit the jackpot. People gamble and win in the stock market all the time, it does happen, but more often then not the gambler loses. Just like a casino, the odds are stacked against you. I would rather limit my risk, cut losses to small percentages, and take my profits at larger percentages and do it consistently. If you trade with this plan, you are sure to survive and be around for a lifetime of profits.
Trading for a Lifetime
There are days when I just need to sit back and let the markets pass me by. You do not always have to trade and the patient traders know this. I look at trading as a business. I would not buy something unless the odds are in my favor that I will be able to sell it at higher prices and profit. If the odds are stacked against me, I do not trade. Tomorrow is another day and the stock market will be around for the rest of my life.
When you get into trading for the first time, you should go into it with the conviction that you will now be trading for a living for the rest of your life. If you have this mentality, you will understand that it is more important not to lose your capital than it is to make money. What that means is simply this, if you are in for the long haul, you must preserve your capital so that you can last a long time in this business. Preserve your capital while you learn to trade. You cannot learn to trade without experience and if you are learning on the job, you are going to make mistakes. This is what the professional traders want you to do. They want you to rush in, not knowing what you are doing so they can fleece you out of your money and send you packing back to your old boss, begging for your job back because you failed as a trader. Do not fall for it. Take it slow and learn before you rush in. Make smaller trades while you are learning and your losses will be small. As you gain experience, you can increase the size of your trades.
From Fantasy to Reality
The reason I wanted to focus on this tonight is because this is the fear that is inside all of us. We have all fit into one of these two categories at some point or another. I used to be one of these traders before I learned the disciplines of a good trading style. Even the best traders still occasionally make mistakes and it costs them dearly. I am writing this commentary because of an email I received from one of our best traders. Someone you would never think would have this happen. He wanted me to reiterate to all of you not to fall into this trap. He made a blunder of a trade last week. He put 20% of his portfolio in one stock that he thought was sure going to blast off. He was wrong and it cost him a lot of money. He got away from his disciplined approach. Let's face it, he gambled and lost. We all have a little gambler in us, but the important thing is to be able to admit it when you are wrong, write the trade down, and remember it so that you do not do it again. The best traders will find a way to quickly overcome these temptations. He tells me the note is imbedded on his computer screen now to prevent him from making this mistake again. He strayed into fantasy land last week, thinking he was better than the market. The market quickly brought him back to reality. Nobody is better than the market and the sooner you learn this, the sooner you will become a trader that will be around for a lifetime of trading profits.
Reminder
There will be no bulletin on Thursday February 24th due to the fact that I will be out of town for that one day. I will not be available for trading that day either. No alerts or trades will be made that day. It will be business as usual on Friday the 25th.
Please Tell A Friend
Please tell a friend about our service. As always, thank you for your support past, present and future! We will see you Monday evening.
Earnings Calendar
Do not forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
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