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]
Deciding if a Stock is Trade-Worthy
October 31, 2007 at 9:58 am
I’ve noted before that I review many charts every night in my preparation for the following trading day, and I will probably always do so. I think there are numerous benefits to it, including keeping a streamlined watch list of trading ideas at your disposal, which greatly aid in my trading.
Since I’ve already reviewed my charting routine, I’m hoping it will help you out to explain a bit just how to go about deciding if a stock is actually “trade-worthy.” There are several things I check for as I flip through the charts, so let’s go through 5 of them and see if there’s some particular aspect of my process which can help you in yours!
Does the stock have a pattern?
I trade from the chart patterns, and the main reason why is that I know where to get into and out of trades. Every trader needs to have some kind of method for determining entries and exits, and for me this comes from the charts. Chart patterns can assist all sorts of trading methods, from short selling to playing uptrends or looking for reversals from support and resistance levels. Regardless of your method, watching the charts closely and having some familiarity with the patterns will help you often in knowing whether a particular stock should be on your trading list.
Does the stock meet your price & volume requirements?
Asking yourself these things when you run across an interesting chart will help you to quickly determine whether you’ll be able to get into or out of the stock smoothly, as well as whether there’s some potential for movement once you’re in. Illiquid stocks won’t have sufficient trading volume, showing an absence of buyers and sellers. That’s never a good thing, because your buy and sell orders need to be fulfilled by other sellers and buyers. The stock’s price can also have an impact on whether you’ll want to trade it, as some expensive stocks can carry a wide spread and move too far for your comfort. At the same time, a cheap stock may not offer up enough opportunity for price fluctuations if you take the trade.
Does the stock have earnings on the near horizon?
This is a big one every 3 months, as a slew of earnings reports begin to roll in about 2 weeks after the end of the quarter. These scheduled news releases are company-specific, and trying to trade them is a complete gamble. A good plan is to simply do your charting homework and then check the earnings calendar from a site like Yahoo Finance to be sure an entry in a stock won’t coincide with the news, particularly since they usually mean significant price gaps.
Does the stock have a history of making tradable moves?
A stock’s character, particularly in recent weeks and months, will play a major role in how (or even if) it should be traded. Watching at recent history to see if a stock tends to make good multi-day moves in a trending fashion, or if instead it typically makes quick one-day splashes followed by indecision will go a long way in helping you determine your strategy in trading it. Some stocks make habits of trending smoothly, while others gap frequently or may simply ignore indicators you rely on in your trading method, and each of these factors should be weighed before an entry is considered. Every stock has a personality, and the key to good trading lies in finding stocks whose personalities match your trading style.
Is the stock approaching key resistance or support?
Some stocks will have every important variable in place, but the only potential impediment to a lasting move could be major resistance or support (for a short sale). These levels will appear as congestion areas on the chart, and will often slow down a stock on its way higher (or lower). Anytime I see these virtual speed bumps on the horizon, I will not consider swing trading the stock but will instead just take it for a day trade to grab a quick move.
No matter which trading method you prefer or timeframe you trade on, make it a point to add some consistency to your preparation process. Having some well-defined qualifications for stocks you’re considering placing trades in will keep you disciplined and will no doubt add a layer of confidence to your approach, which will help you get back on track when you need it and stay there.
Trade well today!
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]
How Pullbacks Help Build New Chart Patterns
October 29, 2007 at 7:10 am
The recent market pullback may or may not be finished, but it brings up an important subject which is why pullbacks within trends are good and healthy. Whether we’re talking about an uptrend like the one the market is currently in or a downtrend like we’ve seen before, prices don’t move nonstop in the same direction without taking some breathers along the way. Call them pullbacks or retracements or dips or whatever, but the fact remains that contra-trend moves certainly help to produce new chart patterns for potential new entries as the trend continues.
In the current market uptrend, pullbacks help to shake up the charts and allow them to reset. This creates new base-building opportunities for stocks which had previously gotten too extended to chase. As a stock goes parabolic and keeps climbing higher without a rest or dip, new buys become very high-risk.
I never want to buy a downtrending stock, but I do get excited when I see pullbacks come along. Even just 1 or 2 bars of downside within an uptrend can lay the foundation for a new base or chart pattern to build. Let’s look at an example and I’ll show you what I mean (click the thumbnails to see the full-size images).
The Uptrend
HANS has been trending higher at a rapid pace, hardly slowing down for new entries. Here’s a look at the run:
(Click for full-size image, courtesy of TeleChart)
The Pullback
A week ago, HANS sold off hard with a pair of downside spikes coming right off the highs, shaking up the overall appearance of the chart and signaling a temporary end to the nonstop run. Although traders who held the stock during the decline no doubt felt some pain, this kind of shakeup is exactly what can bring opportunity. The pullback itself doesn’t make a new base, but it does create the framework for a new base to mature from. Here’s a look at HANS post-pullback:
(Click for full-size image, courtesy of TeleChart)
The Rebuilding Phase
Since the dip, HANS has bounced again and currently is back near the highs. This allows us to draw two trend lines, one along the recent lows and the other along the recent highs, creating a bullish ascending triangle pattern. This hypothetical example shown below needs more time to mature and really develop fully before it would be a trade I’d take, but I’ve drawn in yellow bars to show how price might cooperate in order to allow this pattern to be complete. Some additional horizontal price action within the blue triangle would create a solid base from which a new advance could build on, while simultaneously providing a tighter natural stop-loss level as the triangle narrows. Here’s a look at one way in which this pattern might progress:
(Click for full-size image, courtesy of TeleChart)
I like the HANS setup and would consider taking it for a trade if it develops the way I’ve hypothesized, but the example should help to show you the kinds of things to look for after seeing a dip in the market or a particular stock which you’ve noticed climbing nonstop. The initial dip sets the base-building process in motion, and that’s always a good thing. Pullbacks should be a welcomed sight for any technical trader, and now you have one example of something to watch for in the charts the next time a dip comes along.
Trade well today!
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]
Technical Picture Improving
October 28, 2007 at 8:25 pm
Last week MSFT the bulls produced a turn back up, bringing about the possibility that the short-term correction might be coming to an end. Each of the major averages poked above their pullback trend lines, setting the stage for another leg up to begin. This is of course looking at the indexes from purely a technical standpoint, so the bulls now have something positive going for them and will have a chance to build on it this week.
Speaking of this week….Halloween is sure to provide some excitement, and not just for candy-lovers like me. 😉 The real fun will be Wednesday afternoon when the FOMC announces its decision on interest rates and its policy statement, which the market will undoubtedly respond to. Big Ben certainly has the ability to shake things up, so although the technical picture is improving, come Wednesday afternoon all bets are off because it will really boil down to how the market likes what it gets from the Fed. Either way, the volatility isn’t likely to go away quickly, which means ongoing opportunity for nimble traders.
Regardless of your directional bias, be sure to check out this week’s Market View page over at TheStockBandit.com before you start your trading week for a closer look at the indexes and some chart comments which were posted this evening (and every Sunday).
Trade well out there this week!
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]
