Our Own Worst Enemy

Stockscores.com Perspectives for the week ending December 12, 2010

In this week’s issue:

Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy

I was in an art gallery the other day and came across a painting depicting a tree being cut down by two men. What was peculiar about the painting was that the men were using a leaf from the tree to do the cutting. The message was obvious and fitting for those trading the stock market.

We are our own worst enemy.

Making money in the stock market would be a lot easier if we did not succumb to the whim of our emotions. If 2011 is to be a year where you beat the stock market, you must overcome these emotional traps:

Fear – fear debilitates our ability to make decisions. Fear in all its forms; fear of loss, fear of ruin, fear of being wrong, fear of uncertainty and fear of what others may think causes us to break our rules. Fear causes us to avoid taking good trades, avoid selling our losers, fail to hold our winners or simply not take action when we need to. It is an irrational response to the market’s message.

Greed – if you want something too much, greed can take over your rational mind. You may establish that you want to make $10,000 today trading but, if the market does not provide the opportunities for you, greed may make you force the trade. You may hold a stock longer than you should because you have not met your goal or you may take a trade that is not good enough. The desire to make money may make you irrational in your pursuit of that desire.

Perfectionism – many traders try very hard to always be right. If the market shows that they are wrong with a loss, they work very hard to turn that loss in to a profit. They may average down on a losing position or just hold the stock after their stop price has been exceeded with the hope that the market will turn around and turn their loser in to a winner. It is the pursuit of perfectionism that causes us to ignore that trading stocks is a matter of probability. Trying to always be right leads to failure, for eventually, one of those losers fails to turn around and gives the trader a portfolio crushing loss.

Pride – it is important to realize that the stock market does not care about you, that in the grand scheme, you don’t matter. I say this because some traders attach their self-esteem to their success in the market. They may avoid making the right decision because of the effect that the decision will have on how they feel. Simply put, you cannot take your performance in the stock market personally because your feelings have no effect on the stock market. (continued below)

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Anger – I have seen traders react to a loss with anger. They may be angry with the decision they made or they may be angry with how the market responded to some information. This anger leads them to make an irrational decision or blame others for their loss. What happens to you in the market is not anyone’s fault but your own and anger will only cloud your judgment for what to do next.

Impatience – trading stocks is a waiting game. You take a trade with an expectation for what will happen in the future but how long it may take is not in your control. More than once I have taken a good trade but exited because I was bored. Many of those trades led to a profit that I missed out on because of my impatience.

Recklessness – the feeling of losing is not a good one and can lead to a laissez faire attitude about the next trading decision. With the hope of taking away the bad feeling, the trader ignores risk management and rational decisions and simply takes any trade that might stop the negative feeling.

Let me assure you that overcoming these emotional breakdowns is more important that understanding any technical indicator, fundamental ratio, news release or trading strategy. Overcoming emotion is the most difficult part of trading and will separate those who succeed from the majority who fail.

Simply saying that you will avoid making these mistakes is easy but doing so when under the pressure that the market inflicts is much more difficult. Every trader needs to go through the list of emotional breakdowns above and think about how they react to these emotions. Write down the mistakes you make because of fear or greed. Think about times when you have been reckless in your trading and write down a plan to overcome them.

Before you make another trade, create a plan to overcome the seven deadly sins of trading. Doing so will do more to your profit than anything else you can do.

Stocks that make breakouts from good chart patterns often pull back before they work on resuming the upward trend. The following stocks made breakouts earlier this week and then pulled back for a few days. Friday, these stocks were able to close up for the day and above their open, a sign that the pull back is over.

1. CRYP
CRYP traded very abnormal volume on Tuesday as it moved from $1.25 to $1.60. Profit taking came in Wednesday and Thursday but that short term trend reversed on Friday when the stock closed at $1.63, up for the day and above its open. Good chance to move higher next week provided support at $1.15 is not broken.

2. T.SVC
T.SVC broke out of a cup and handle pattern on the 2 year daily chart, making the break on Monday. The stock pulled back through the rest of the week but found buyer interest again on Friday. Support at $2.35.

3. WSTG
WSTG has been trading with low price volatility for a number of months but came to life on Friday as it broke through resistance on strong volume. The stock is building long term upward momentum with resistance at $16. Support is at $9.80.

References
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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.

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.

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.