No Fear

Posted by Tyler Bollhorn - StockScores.com

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Ed Note: Tyler Bollhorn gave superb insights into how to trade in the Money Talks in the Money Talks Super Summit available by video by clicking on the banner above or HERE.:

 

No Fear

Stockscores.com Perspectives for the week beginning Nov 15nd, 2009

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I think that many traders have a hard time believing that 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 pay check. Work hard, your pay checks will grow. But the thought that you can make money by putting your feet up is a difficult thing for most 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 own a marginal stock 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 in to 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.

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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 of a high speed bus that is headed for Profit City.

So what is behind this destructive behavior? It is that deep routed emotional response to danger that keeps us out of trouble but also makes us avoid a greater feeling of fulfillment.

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?

If you are a normal human being, you do the opposite. 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 will bounce back eventually, I will just be patient.”

What your subconscious mind was really saying was, “It is much too painful to sell this loser and see that loss of my hard earned capital. I will hold on with the hope that it goes back to what I paid for it and then I will sell.” And of course, it continued lower because there was something wrong with the company and it deserved to go lower.

So what can be done 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 my Seven Criteria for Fearless Trading:

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 to simplify the trading approach. Write down your rules and do nothing if every rule is not 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 is happening in the game. As a technical trader, all that matters to me is what the chart is telling me.

Plan Your Losses
Before you enter a trade, figure out what needs to happen for you to consider the trade a loser. For me, that is a move through chart support; I plan to exit the trade when the stock goes through a psychological floor price on the chart. Understanding where that point requires some experience and knowledge but once you know how to identify support on the chart, plan your losses.

Plan the Trade
I find it helpful to predict pull backs. My rational side knows that stocks can not go straight up and that they must suffer pullbacks to recharge buyer interest and shake out weak holders. My emotional side feels fear when those pull backs happen. If I plan my trade and build in expectations for the counter trend pull backs I can deal with them better and have a greater chance of not succumbing to the fear when they do.

Don’t Fall in Love
I don’t want to know too much about what a company is doing because I have found that the more I like a stock the more likely I am to not listen to the message of the market. There is a lot of bias in the information that we receive about companies and what they are doing. The ultimate arbiter of truth is the market itself; we should have a greater faith in the opinions of thousands of market participants than a few biased sources of information.

Tolerate Risk
Without risk, there is no potential for return. To avoid trading with fear we have to be comfortable with the risk. If not, we will let fear guide our decisions and those decisions will probably be wrong. Therefore, do not take more risk on a trade than you are comfortable losing. Plan your losses based on how much you are willing to lose and let that determine the size of your positions.

The Profit is in the Patience
When a trade is working, let it work for you. A business owner does not fire her best employee. A hockey coach does not send his best player to the minor leagues. A company does not stop making their best products. Hang on to your best stocks with the same attitude. Hold the stock until there is a rational reason to exit the trade rather than selling because it feels good. If you are taking quality trades and trading without fear, you will feel better over the long run.

The time to get started on your reprogramming is now. Don’t expect to break habits built up over a life time in a couple of days. The battle against your fears is one that takes time win but with determination you can do it.

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A move lower next week is likely although it is not certain (nothing is ever certain in the stock market!). We have to adapt our strategy to what will probably happen in the market, so we should be approaching next week with some ideas for shorting stocks.

I don’t feel that the market is topping out and on the verge of a long term downward trend. For now, a few days of weakness and a pull back to the upward trend line is what is likely. Therefore, our strategy should be to short with a relatively short term time frame for the hold.

That means a swing trade is best and, for this, I like to look to the Exchange Traded Funds. There is too much potential for surprises with individual stocks but the indexes that the ETFs are based on will move lower if the overall market moves lower. Plus, there are some ETFs established to go up when the market goes down.

Here are some swing trade ideas for next week:

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1. SPY
the SPY broke its upward trend line on Thursday, rallied back on Friday but formed a falling top. It looks like it will go lower; I would consider the trade a bust if the daily close can be above $110.09. You can also trade this by going long the SDS, a leveraged short ETF that goes up if the market goes down.

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2. IBB
I like a short on IBB because the daily chart shows a series of falling tops forming and the intraday 60 minute chart shows a break of the short term upward trend line. If there is a close above resistance at $79.27, dump it.

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3. T.XIU
T.XIU hitting resistance at the downward trtend line, it should go lower next week. Set your stop loss point at $17.30. You can also consider the leveraged short ETF T.HXD which will go up if the market goes down.

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Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.

Slowly, he began to learn how the market works, and more importantly, how to consistently make money from it. He realized that the stock market is not fair, and that a small group of people make most of the money while the general public suffers. Eventually, he found some of the key ingredients to success, and turned $30,000 in to half a million dollars in only 3 months. His career as a stock trader had finally flourished.

Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.

References
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Disclaimer
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.