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Tuesday, January 17, 2006
Market Recap
It was a slow start to the week for stocks after a long 3 day market holiday. Selling pressure opened this holiday shortened week with the Dow losing 63 points, the Nasdaq down 14 points, and the S&P losing 8 points. The pullback today and any other pullbacks like these in bull markets are very constructive and should be viewed as buying opportunities until otherwise proven different. Right now, the trend of the market is up so we should be looking forward to days like this because they will provide us with a chance to enter strong stocks at a discount. Today we saw many of these strong stocks pullback to their respective 9 and 20 day EMA's. These are good risk/reward areas to take positions. We opened a couple of new positions with the assumption that earnings reports released this week from a few big tech giants will be good enough to get the market excited and for buyers to continue to push stocks up in this early 2006 rally.
The Overconfident Underperformer
It is common for traders to complain of a lack of confidence in their trading, but very often it is overconfidence that does them in. Overconfidence results from a lack of appreciation of the complexity of the stock market and an underestimation of the challenges of trading successfully. In a sense, overconfident traders lack respect for the markets. Overconfident traders do not want to work their way up the trading ladder. They resist the idea that screen time is the best teacher. They also scoff at the idea of growing their account slowly over time with consistent trading methods. They want big positions and profits right away. Because they are so eager to make money and so sure they can make it, overconfident traders generally trade impulsively. Instead of being patient and waiting for short-term patterns to align, they will jump the gun and get whipsawed in the process.
The hallmark of overconfident traders is thinking they will make something happen in the market, instead of patiently waiting to take what the market gives them. Spelling out profit goals for each day or week of trading is one sign of overconfidence. Humble traders know that sometimes the trade just is not there. If the goal for an overconfident trader is to make $1000 a week, they will end up forcing trades in order to try and reach their goal even if market conditions are telling them not to trade.
The overconfident trader feels that they are bigger than the market and will often try to catch the tops of bull swings and the bottoms of corrections. As a result, they often fight the market trend and get run over in the process. The emotional signs of overconfidence are impatience and impulsivity. Overconfident traders overtrade, they fear missing opportunities more than they fear losing money.
The Antidote to Overconfidence
The antidote to overconfidence is rule-based trading and the intensive rehearsal of trading rules. By doing this, traders can greatly reduce their impulsive trading. Very often this means:
- training oneself to focus on and rehearse the “what-if” scenarios of being wrong in the market,
- forcing oneself to spell out the rationale, targets, and
- using stops for all trades to gain greater control
Practicing these things can be an encouraging restraint being overconfident.
Today's Bonus Chart: OSCI
Click the following link to view today's bonus chart in the Public Chart lists:
http://stockcharts.com/def/servlet/Favorites.CServ... (first chart)
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