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Thursday, June 23, 2005
Market Recap
Well, something had to give soon and it did today. The market tried to rally again this morning and the NASDAQ got as high as 2106 but as soon as it hit that level, it reversed once again, failing to breakout above that critical resistance area that we had been speaking of for the last couple of weeks. Oil hit $60.00 today and closed up another $1.33 at $59.42. This is an all time high for oil prices and it has certainly rattled the stock market today as the DOW suffered a triple digit loss of 166 points, the NASDAQ drop 21 points and the S&P lost 13 points. All three indices closed at their lows and produced bearish candles on their respective charts. No doubt about it, this reversal today was as ugly as it gets but really should not come a shock to anyone. We have been saying that the resistance was going to be tough to get through at 2100 and when a third attempt fails, it is usually a sign to run for the hills, at least in the short term. Had we closed above 2106 today, it would be time to get long fast however, today's reversal changes that position. Now we have to be in a more cautious mode.
In light of our recently blended trading styles, we would like you to go into this weekend and think about the following topic. Come back on Monday with your plan and be more ready then ever to trade this market. However, due to today's market action, your trading may be delayed for a little while until we figure out where this market wants to go. Due to the length of tonight's commentary, there will be no charts tonight.
Building a Winning Trading Plan
There is an old saying in business, "If you fail to plan, you plan to fail”. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either follow a plan, or you can fail." That is it in a nutshell. If you have a written trading plan already, congratulations! While it is still no guarantee for success, a plan is better than none at all. If your plan is flawed, at least you have something that can be adjusted. Your success would not come immediately, but at least you are in a position to chart and modify your trading activity. By documenting the process, you learn what works and how to avoid repeating costly mistakes. If you have a plan, super, keep modifying it. If you do not, I have listed some ideas that can help you get started.
Assess Your Skills
Ask yourself the following questions: “Am I ready to trade?”, “Have I tested my system on paper, before using my real money?”, “Do I have confidence that my system is going to work?”, “Can I follow my signals without hesitation?” If you can answer these questions with an honest yes then you are ready to take that first step and begin trading for a living. The stock market is set up to separate you from your money and transfer wealth to the professional trader. Trading is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who seem content to hand their cash over. These novice traders, lacking a plan, give their money away through costly mistakes. This may sound brutal but I have got to tell it like it is. It is your job to take the crowds money from them and make them pay dearly for their mistakes. The market does not tolerate people who lack respect for it. The crowd lacks respect for the market and for this, they will pay. Always respect the market and never become complacent. Always look for the edge, look for the advantage. Your cash is on the line, you cannot let them take it from you.
Mental Preparation
How do you feel? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the market, it is better to take the day off or otherwise risk unnecessary losses. Trading is financial war. It is you against everyone else. When you enter your trading room, there are millions of people trying to take your cash by getting the better of you in a trade. For every trade you make, there is somebody on the other side of the trade who thinks you are wrong and they are right. Only one of you can be right and they have no mercy. I remember what my martial arts instructor told me years ago while I was training for a big tournament. He said, “For every hour you are not training, your opponent is in the gym training with one purpose in mind and that is to beat you.” Trading is the same way, it is a constant learning process and when you are not doing all you can do to better your trading, your opponent is. Without mental preparation, you will lose. If you are angry, hung-over, preoccupied or otherwise distracted from the task at hand, you cannot consistently make money. Many traders have a routine before each market day that prepares them for the day ahead. You must do this also. Create one that puts you in the trading zone.
Set Some Goals
Before you enter a trade, make sure you have a risk/reward ratio that makes sense. Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is $1.00 below your entry point, then your goal should be at least $3.00 to the upside. If resistance is $3.00 above your entry, then the trade makes good sense. If resistance is just $1.00 above your entry, then this trade has a very high risk verses reward and should not be taken, in my opinion.
Preparing for the Trade
Whatever trading system or program you use, identify major and minor support and resistance levels, set alerts for entry and exit signals and make sure you can easily see and detect all of the signals that your system generates. Your trading area should be free from distractions. No small children running around and needing attention. No trying to listen or watch that movie that you rented last night and did not finish. No trying to catch an afternoon baseball game on TV while trying to trade. I love baseball, but I do not watch any games during market hours, if one should be on. I reserve that for the evenings only. Remember, you are trading for a living and distractions can be costly.
Exit Rules
Most traders make the mistake of concentrating only on their buy signals and entry points and pay little attention to when and where to exit the trade. Many beginners would not sell if they are down because they do not want to take a loss. They say, “It is not a loss until I sell.” I got news for these people. At the end of the day, if their account value has dropped significantly, they have lost money, whether or not they have sold the stock. If your stop gets filled, get over it or you will not make it as a trader. If your stop gets hit, it means that you were wrong but do not take it personally, it is part of the business. I lose more trades than I win when I day trade because of my tight stop loss rules but I am still able to trade for a living and make plenty of profit by managing money properly and limiting losses. I do not care if I am wrong 4 out of 5 times. I never risk more than a set percentage of my portfolio on any trade and all trades are equally distributed. If I lose 1% on the 4 trades and make 10 or 15% on the one winner, I am going to have a substantial overall gain at the end of the year.
Record Keeping
After each trading day, adding up the profit or loss is secondary to knowing the why and how you did it. Write down your conclusions in your trading journal so that you can reference them again later. All good traders keep good records. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so that they do not repeat the same mistakes. Record comments about why you made the trade and the lessons that you have learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system. Record the average time per trade, this is necessary to calculate the efficiency of your system. The longer the stock takes to move after you are in the trade, diminishes the efficiency of the trade. It may be a winner, but if it takes too long to get there, funds are tied up and opportunities are missed elsewhere.
Final Thoughts
There is no way to guarantee that a trade will make money. Your chances are based on mathematical probabilities, your skill and the system used. There is no such thing as winning without losing. Professional traders lose many trades, it is the excellent management of there capital that keeps them in the game. By letting your profits ride and cutting losses short, you may lose some battles, but you will win overall. Most traders and investors do the opposite; they cut their winners short by taking the small gains while refusing to part with the losers, which is why they never make money. The goal of any trader should be to gain enough skill to use their system so that they are able to make trades without second guessing or doubting their decisions
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
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