Archive for November, 2007

Overcoming Trading Disasters

November 12, 2007 at 6:50 am

Running a subscription-based stock pick service, I have the opportunity to interact with quite a few traders on a regular basis. In a group of that size there are diverse styles, varying risk tolerances and numerous trading timeframe preferences. However, every style offers the opportunity for the occasional blow-up to occur.

I get contacted by traders on a somewhat regular basis wanting some help getting back on their feet after a trading disaster. Sometimes these blow-ups are self-infliicted (overtrading, breaking rules, throwing discipline out the window, etc.), while others are market-inflicted (news gaps, downgrades, corporate investigations, etc.). Both kinds are hurtful to a trader’s account and psyche, but the road to recovery is similar for both situations…if they’re willing to walk it.

I can certainly sympathize, as I have definitely been there. Blown stops, overtrading, revenge-trading, throwing rules out the window…all of it can add up to a big nasty down day that was never intended or expected. I’ve felt the shock, disgust, frustration, and pure disbelief of days like that, and it is absolutely zero fun. If you’ve recently suffered a big trading setback, I won’t kick you while you’re down, but I’ll be honest here and tell you what I think you ought to hear.

Paying Market Tuition

We all have our “refresher courses” in market education, so since we’ve paid a high tuition we certainly don’t want to lose the lesson. As long as these occasional disasters don’t knock us out of the game, they can actually make us better traders if we’ll allow it. They really ingrain in us the things we ought to be doing. The wounds from such events take time to heal from and they do leave a mark, but that serves as a reminder to stick with what we know works and get back on the right track. Until a full recovery is made, looking at your account equity reminds you of how it happened. It will motivate you like nothing else to avoid letting it happen again. There is some value in that, even if we overpaid for it.

Don’t make a bad day worse. Whether you get kicked in the teeth by a morning gap against your overnight position or you’ve simply hit your daily limit on losses, it can be a very tall order to make it back quickly. Many a trader can relate stories of attempting a comeback from a trade gone bad only to dig deeper into their hole, ultimately finding themselves down farther than they were when their bad day began. Chalking up the loss and staying picky so as not to add insult to injury can prevent more pain and sometimes let you chip away at it. If you venture into the market beyond your “uncle” point, be selective and keep your risk to a minimum.

Honor thy stop. Many active traders have gotten to the point where they trust their ability to exit when the time comes, but there simply is no substitute for having a hard stop in place. Knowing the key levels at which you need to close out a bad trade is one thing, but pulling that trigger and abandoning hope of a rebound is something entirely different. Ugly days have a tendency to tug at our need to be right, but remember that the market is always right. Limit the damage you will suffer from losing trades, and keep yourself in the game so that you can recover from losing trades without needing a miracle.

Return to what works. After a blow-up, aim to hit singles and restore your confidence in such a way that it can be built upon. Reflecting on stretches of consistent profitability will serve as a reminder of what has worked, and that’s usually the ideal place to begin. Get back to hitting singles and work your way back up. You can do it and it will take time, but if you can establish some consistency now, it will pay even bigger in the future.

Avoid Temptation

After a trading disaster strikes, the urge is usually to try to make it back in one play, returning quickly to previous account levels. You can easily double your pain if you fall for it, but those who succumb to that urge may never ever recover. I’ve seen plenty of traders take that route, and before they know it they’ve let one bad day send them into a downward spiral, never to return. Additionally, finding temporary success by swinging for the fence right after a big loss will only reinforce the very bad habits which you need to shun. Avoid it if you can. You might recover this time, but eventually that approach will seal your fate – and not in a good way!

Instead, return to a methodical way of trading where you’re looking for a day’s pay. Give your account time to recover before you start looking for the bigger swings again. The trader who suffers a big hit is rarely thinking clearly, and he needs to get back on track before considering any aggressive plays. That can take a while, so accept that fact if you really want to be good at this.

Another thing to consider is just taking a break from the market. Take a week off, and the market will be here when you get back. What you don’t want to happen is that you look back on is this moment and know that you put yourself at a crossroads in your trading career when you didn’t have to. Don’t let a frustrating day get the best of you so that 6 months from now you look back and know that dealing with it poorly ultimately sent you packing. Let your emotions come down and cool your jets. That way you will return with a clear head and a defined approach you want to take going forward.

Soaking it In

We all have a tendency to want to forget bad experiences, but that isn’t the best way to deal with a trading blowout. Spending some time reflecting on the events can be a healthy step in the healing and recovery process. Re-live those emotions and let that bad taste sink in so that you don’t do it again. Many trading blow-ups come as the result of a lack of willpower, but growing passionately dissatisfied with the loss of control will certainly help to avoid a repeat offense.

Find every possible way to build consistency and eliminate risk on each trade, every week, month after month. It won’t always be roses, but it certainly will eliminate the blow-up factor. Coming up with a defined plan for every trade ahead of time will force you to add structure. Blow-up days distinctly lack structure, and when we have them we put on trades on a whim, spontaneously throwing money at the market wall and hoping something will stick. Long-term trading success isn’t built on that – it’s built on consistency.

If excitement is what a trader is seeking, then the market certainly offers it. But if an escape from a monotonous job and the hope of making a living from the market is the aim, then trading blow-ups absolutely must be avoided. Put a cap on your daily max loss. Put a limit on how many trades you’ll let yourself place – if you only had 3 to make every day for the next week, you’d certainly make them count I bet. Rein in the horsepower and get a bat on the ball for a little while. The money can come later after you find your groove again, but don’t let one trading disaster trigger a much larger slide.

Finally, wouldn’t it be satisfying if you were able to designate a point in the future, weeks or months away when you would have fully recovered and climbed back from such an awful experience? Wouldn’t that be a huge source of confidence for you going forward as a trader? I know it would.

Resolve to climb back, be methodical, and stay patient. You can do this!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Welcome Barron’s Readers!

November 10, 2007 at 12:12 pm

Just wanted to say welcome to all the Barron’s readers visiting TheStockBandit.net. Thank you for stopping by and I’d like to give you a quick tour of the blog so that you can get a feel for what I like to write about.

You can read the about page for more info on my background and this blog. I write a nightly stock newsletter over at TheStockBandit.com for traders wanting daily ideas, but I put out regular content here on the blog which I hope you find useful whether or not you subscribe to the paid service. I’m a technical trader, a new father, and I wear t-shirts to work!

As for the tour of this blog, you will find over 300 posts here from the past couple of years along a variety of trading subjects. I’ll run through a few highlights from the archives which you might want to check out.

Here are a few articles about my trading style…
*Deciding if a Stock is Trade-Worthy
*Small Mistakes = Small Consequences
*Goal Number 1
*The Day After
*Check Your Rolex
*Another Definition of Trading

A few articles on trading psychology…
*Slay Your Trading Giants
*Trading Discipline
*How Gaps Change Motivations in the Market
*When Bulls Become Sellers
*The 2nd Worst Feeling in Trading
*My Biggest Trading Fear
*3 Signs You Have a Pet Stock
*Gap Lessons: When Trades Get Lucky

Here are a few how-to articles I’ve written…
*How to Grow Your Trading Account (Part 1)
*How to Grow Your Trading Account (Part 2)
*Gauging Urgency in Chart Patterns
*3 Keys to Buying Dips
*Finding Short Sale Candidates
*Stop It!
*How I Use Worden’s TeleChart 2007
*Watch List Management
*Blending Your Style With the Current Environment

Regardless of what you choose to read about while you’re here, I hope you find it useful to your trading approach. This blog exists for that very purpose, so make yourself at home and come back often!

And by the way, if you’d like to subscribe to this blog, here’s the feed you can put in your RSS reader. There’s also a feed reader icon in the righthand sidebar which will do the trick, or just beneath it you can subscribe by email so that you won’t ever miss a post!

Thanks for stopping by to visit, and enjoy your weekend!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading, Barron’s[/tags]

Modern Day Darvas Methods

November 6, 2007 at 6:50 am

One of my favorite trading books is the all-time classic, “How I made 2MM in the Stock Market” by Nicolas Darvas. The book outlines how Darvas became a successful trader by overcoming his own mistakes through his ‘box theory’. Having gone through several different methods without finding any consistency in profitability, he ultimately became a chartist and a millionaire – imagine that! 😉

I’ve read this book probably 10 times over the years. One thing which stands out to me is that he found success by avoiding getting spooked out of good trades, which would have happened to him had he watched the tape too closely. Darvas’ inability to keep close tabs on the market at all times allowed him to let his trades fully develop, preventing him from micromanaging his positions. If you’re like me, you might stand to benefit from such an approach.

While traveling the world by way of his profession as a dancer, he received his weekly copy of Barron’s, and reviewed his stocks of interest through these quotes which were delayed by days. After reviewing the prices and locating his favorite chart pattern, he would wire detailed trade instructions to his broker. Although today’s markets move faster than they did back then, at the end of the day he was simply focused on the price action and how his stocks were moving – just as we all should be. This means he was not being distracted by the extra “noise” of every tick, geopolitical news, rumors or sentiment.

A member at TheStockBandit.com brought this up in the discussion forums not long ago, stating that since he works all day and can’t micromanage his trades, he has let them develop more fully without overreacting to every little blip that comes along. Many of us fight the urge to react to every tick, and with dirt-cheap commissions and sophisticated trading platforms, we can micromanage trades quite regularly if we allow ourselves to! I found myself in a doctor’s waiting room the other day checking quotes on my PDA, even though I knew my safety nets (stop loss orders) were in place. I think it’s a good idea to stay connected to the market (even Darvas did that via his Barrons), so long as we just don’t succumb to the urge of taking action when no action is really needed.

Here are a few ways a modern-day Darvas might prevent micromanaging trades:

* Use Your Platform Tools. Set it and forget it. Whether you have sophisticated tools like bracket orders or just the basics, use the tools your broker has provided to help you structure your trades in such a way that they have the ability to play out without needing your constant supervision. This will help you to trade without emotion and allow you to fully implement your strategy for the trade from start to finish.

* Hide The Number. I’ve written about hiding the number before, and I think it can be quite beneficial, whether it’s your account balance or even just your P&L on trades. A trader friend of mine claims that hiding his P&L has made the biggest positive impact in his trading – more than any tools or indicators. It’s an interesting concept, particularly if you find yourself overreacting to every little pullback or advance. By giving his broker trade instructions ahead of time, Darvas didn’t watch his P&L or spook himself out of trades.

* Turn off the news flow. Darvas found that his absence from the Street allowed him to stay in trades longer so that he could let his original game plan play out. That means he was not surrounding himself with rumors or opinions or the news flow. He didn’t make bets based on gut feel – he stuck to the charts, trading from the price action when opportunies arose. If for you that means turning off CNBC, avoiding comparing opinions with your trading buddies by staying off of instant messenger or Skype, then so be it. Whatever helps you make your money is what you need to focus on. Remember, Silence is Golden!

Every one of us has some things to practice and refine in our trading. If you find yourself letting every tick influence your trading decisions too much, then take more of a Darvas approach and see what happens. You just might realize that your original game plan will serve you far better than shifting gears on the fly in an effort to control every move of your stock.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading, Darvas[/tags]

Staying Connected to the Market

November 5, 2007 at 12:35 pm

The holidays are just around the corner, and for me that means some travel to visit family in other cities. Fortunately, that doesn’t require having to be out of touch with the market. When things heat up on the trading front like they have been lately, I have a hard time stepping away from it!

Whenever I leave town for the holidays, I travel with my laptop and can visit some “hotspots” or just connect at wherever I’m staying if I really need to get online. Even better, I have internet access on my Treo smartphone. The Treo is great for staying connected, and I really like the email and internet features of it. However, trading is the most important option it provides me.

I have accounts with brokers who provide a streamlined way to trade and/or monitor positions by way of my Treo. My primary broker lets me pull up a simplified version of their trading platform to monitor positions and real-time P&L, keep watch lists, and even close out all open positions (bail) with the push of one button! How cool is that?! Your broker probably offers something similar, so ask them if they have a streamlined mobile link which can load faster just for this purpose. After all, being out of your element these days doesn’t mean you can’t keep tabs on the market or your positions.

So if you need something useful to add to your holiday gift idea list, put a web-enabled phone or PDA on the list with a data plan. Whether it’s an iPhone, Blackberry or Treo, it is great knowing that although you might physically be away from the PC that you’ll still be connected to the market whenever you have the need.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]