This week’s Trading Lesson
Here is an excerpt from my upcoming book, The Mindless Investor, How to Make Money in the Market by Overcoming Your Common Sense. This piece is from the chapter, Be Fearless:
I think many traders have a hard time believing they can make money by buying a stock and waiting. Most of us are not taught to make our money work for us but instead that we must work for our money. Go to a job, put in the time and you get a paycheque. Work hard, and your paycheques will grow. But the thought that you can make money by putting your feet up is a difficult thing to grasp.
With that mental programming, most of us have difficulty holding on to our strong stocks and letting the profits grow. If we buy a stock at $1 and it goes up to $1.20 in a couple of days, we are likely to sell. In some ways we think of this fast return as good luck, not much different than buying a winning lottery ticket. We have a fear that someone is going to figure out that we have benefited from a mistake, and so we better get out now before we get discovered.
This thinking is strengthened when we take a trade that’s less than ideal and it goes down as quickly as it went up. If we take a marginal trade we should expect marginal results, but somehow we only remember the negative feeling of watching a paper profit turn into a loss. We tell ourselves that next time we will sell at the first sign of weakness and crystallize the gain. Avoiding pain is human nature.
Our next trade is of higher quality but we sell it on a short-term weakness and lock in a quick but relatively small profit. While lost in self-congratulations we realize that someone named Murphy is writing the laws of trading, and we watch the stock march ever higher with us eating the stock’s dust. We have jumped off a high-speed bus that is headed for Profit City.
What is behind this destructive behaviour? It’s that deep-rooted emotional response to danger that keeps us out of trouble but also makes us avoid a greater feeling of fulfilment.
Fear is what makes us sell our winners too early and hold our losers too long.
The best traders are not afraid of holding on to strong stocks, they are afraid of holding on to losing stocks. What do you do when you trade?
If you are a normal human being, you do the opposite of what the pros do. Think about the last loser that you owned. As the stock fell lower and lower, what was it that you told yourself over and over?
“It’ll bounce back eventually. I’ll just be patient.”
What your subconscious mind was really saying was, “It’s much too painful to sell this loser and see that loss of my hard-earned capital. I’ll hold on with the hope that it goes back to what I paid for it and then I’ll sell.” And of course, it continued lower because there was something wrong with the company and it deserved to go lower.
So what can we do to fight our destructive minds? How can we program ourselves to hold on to our winners and dump the losers? How can we trade without fear? Here are three of my seven criteria for fearless trading:
Only Trade Quality
Our fears are confirmed when we enter marginal trades. If you only trade the best opportunities, you will trade less but you will have greater success. This will put you on the road to fearless trading and help you simplify your trading approach. Write down your rules and do nothing unless every rule is satisfied. When you consider a stock, look for a reason to avoid the trade. If you can’t find one, then you have a trade worth taking.
Buy with Confidence
The rules that you trade with have to have a foundation of success. You have to believe in your rules or you won’t believe in holding the stock through the shakeout periods in the longer-term up trend. Analyze and test the strategy until you have proven to yourself that it works. Then trade it slowly without a lot of risk, so you can gain a greater level of confidence that it works.
Don’t Watch the Scoreboard
Sports fans don’t spend a lot of time watching the scoreboard during a game. It only matters when the game is over. In trading, the scoreboard is the profit and loss figure for your account. If you focus on the scoreboard, it is likely that you will lose sight of what’s happening in the game. As a technical trader, all that matters to me is what the chart is telling me.
STRATEGY OF THE WEEK
With the US election on Tuesday, the market has been very quiet recently with few investors willing to make a significant move ahead of the vote. Tonight, I ran a Market Scan on Stockscores with the following settings:
Sentiment Stockscore > 60
Breakout through 80 day Resistance
Volume above 20 day average
Trades > 250
Here are some of the stocks that I feel have good charts:
STOCKS THAT MEET THAT FEATURED STRATEGY
AIQ is making a cup and handle pattern breakout with increasing volume over the past few days. Support at $1.33.
I featured MSPD in the daily newsletter two days ago, it has been moving higher through resistance from an optimistic chart pattern. Support at $3.34.
T.RIM (RIMM on Nasdaq) is shaping up as a nice long term downtrend reversal pattern. Support at $7.55.
Stockscores Mindless Investor Book Launch Special Event
Calgary Monday Nov 12 6:30 – 8:30 pm
Vancouver Tuesday Nov 13 6:30 – 8:30 pm
Click here for information and to register for this free event
Join me as I show some of the ways I use Stockscores.com to pick and track stocks and ETFs. This is an informal evening focused on the analysis of the current market and a hunt for ways to make money from it. Free to attend and copies of my new book, The Mindless Investor, will be available for purchase for $30. Please register to attend and let us know how many copies of the book you wish to purchase in the comments section of the registration page so we can bring enough copies.
Stockscores Trader Training
The 12 week Stockscores Investor and Stockscores Active Trader training programs start with the live Foundation class on November 24th in Vancouver and November 25th in Calgary. Click here to visit the information page.
Live Trading Day
For those who have completed the StockSchool Pro, Investor or Active Trader classes in the past, I will be doing a live trading day in Calgary on Monday November 26th. Watch me trade live and learn the processes I go through to find day and swing trading strategies. Emailtylerb@stockscores.com for more information.
Stockscores Market Minutes Video
Traders are challenged with finding the right stocks at the right time. The Stockscores Market Scan tool allows you to scan the market using a wide range of filters. In this week’s Market Minutes video, I demonstrate how to use it. You can watch this week’s video on Youtube by clicking here. To receive email alerts any time I upload a new video, subscribe to the Stockscores channel atwww.youtube.com/stockscoresdotcom.
- Get the Stockscore on any of over 20,000 North American stocks.
- Background on the theories used by Stockscores.
- Strategies that can help you find new opportunities.
- Scan the market using extensive filter criteria.
- Build a portfolio of stocks and view a slide show of their charts.
- See which sectors are leading the market, and their components.
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.