Stop It!
September 6, 2006 at 9:56 am
We all know what happens after the stop!
I used to think that the most successful traders just knew how to locate the big winning trades and that was the key to their profitability.
Not anymore – I’m past that, and thankful that I finally realized it. It took some time, probably because of the irony of it all. Who would have thought that the best traders’ real key to consistent profits in the market all boils down to humility and their ability to get out of trades when they need to the most? What happened to bravado and having the guts to take the plunge and go big when you really feel you’re right? Is that not how the best traders do it?
Occasionally that approach might give you a windfall profit, but what happens when you’re wrong (and you WILL be)? If you don’t have an exit plan, you’re gonna be toast. It’ll be Hammer Time for your account, and it won’t be pretty or fun!
If you don’t respect the market, it will force you to respect it.
I’m a huge advocate of using stop loss orders, regardless of your operating timeframe. There are plenty of reasons to sell your stock, but the most basic premise is that once your trade stops behaving as you expected, it’s time to consider kicking it out the door.
3 Signs You Have a Pet Stock
August 23, 2006 at 12:03 pm
One of my top 5 trading books is How I Made $2,000,000 in the Stock Market by Nicolas Darvas. From time to time I re-read this book because there are some good lessons and reminders in it. On page 11, Darvas refers to stocks he was trading in a funny way but one which all traders have been familiar with at one time or another:
“…For some of them I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine – other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep ‘pets’.
I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from any other stocks. This state of mind lasted until I realized that my pet stocks were causing me my heaviest losses.”
No doubt we’ve all encountered our share of “pet” stocks, but are you holding onto any of them right now? Here are three signs you may have a pet stock:
Slay Your Trading Giants
August 9, 2006 at 5:20 pm
They’re waiting for you when you wake up. They may have prevented you from sleeping at all.
They might come around before the opening bell, and sometimes they won’t leave even after the closing bell rings.
If you don’t skip a trade because of them, then you’re likely to hear them after your order gets filled.
They are your trading giants, filling your head with anything but confidence, and you must overcome them if you’re going to make it in this business!
Gotta Love Second Chances
August 7, 2006 at 4:42 pm
Second chances are so nice to get, even if we don’t deserve them! If you pay attention in this choppy market environment, you’ll often find that you get multiple chances to get into a trade (and profit).
This could be viewed as frustrating, as a stock breaks down or breaks out, only to quickly return to the support or resistance level. However, it can be great if you get caught snoozing on the first move!
Last night in my stock newsletter, I highlighted NTRI as a potential short. NTRI had broken down a couple of weeks ago and since then had formed a bear pennant pattern. A break below $51.00 at the lower trend line was the trigger for my short sale.
(Click image for full size) NTRI was primed and ready to break down from this bear pennant pattern, with the trigger being a break of the lower trend line at $51.00. NTRI triggered soon after the open today and I was able to short sell it as it broke through the $51.00 level (thank you ARCA market sell/short!). Had I missed the first entry, I would have had another shot at getting in the trade by offering into the first bounce which carried it right back up to the $51.00 level (funny how that works!).
(Click image for full size) NTRI broke the $51.00 level right off the open, but the bounce which followed provided another shot at entering this trade. Gotta love those second chances! Fortunately, NTRI drifted lower throughout the day, providing a nice trade whether you caught the first or second entry. In fact, if you don’t like to trade breakouts/breakdowns, you may actually prefer to bid into pullbacks or offer into bounces in order to establish a position – if so, this is an excellent market for you. Be on the lookout for second chance entries in these choppy conditions, and you’re sure to find some second chances to profit!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
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[tags]Stocks, Investing, Stock Trading, Short Sell, Trading[/tags]
Keep it in Perspective
August 1, 2006 at 11:22 pm
I just read Toddo’s latest post at MarketWatch and although I was already somewhat familiar with his story, reading it was 5 minutes very well spent.
He wrote it at a good time for a lot of traders caught on the wrong side of the market lately, so if that’s you be sure to check it out. His perspective is honest and clear….. “be careful what you wish for,” he even warns. At the end of the day, he’s dead right. Regardless of what you’ve made (or lost) as a trader, you’re going to need people by your side to make it even halfway worth while.
If you’re struggling right now, keep things in perspective.
One-Question Interview at StockTickr: Lessons I’ve Learned in the Downtrend
July 26, 2006 at 9:11 pm
Big thanks to Dave over at StockTickr for his One-Question Interview with yours truly. Dave has interviewed me before, but this one focused on “What trading lessons I’ve learned from the downtrend that started in May,” so I was happy to oblige!
By the way, if you haven’t checked out StockTickr, you owe it to yourself to do so! It is a fantastic product and there are great updates made constantly as new ideas are implemented to provide users with even more useful trading tools, so it will be fun to see just what else it will be capable of providing as time goes on. There are also some great interviews at the StockTickr Blog which you’ll want to check out.
To expand a bit on the lessons I’ve been reminded of since May, let’s take them one at a time:
Shorts work faster than longs. Aside from my earliest days as a trader, I probably learned the most during the bear market from 2000-2003, actually doing rather well with my trading during that time. That period forced me to learn several methods of shorting stocks, and my education during that time has served me well the past couple of months. We have caught some great moves on the short side the past couple of months over at TheStockBandit.com which has allowed subscribers and me to continue finding profitable trades even though the market turned ugly. The biggest moves occur during bull markets, but some of the fastest profits come on the short side.
Trapped bulls sell into strength once the market tops out. This is what we’ve been seeing since May and even saw another round of it last week with a big rally followed by two more days of selling. Bulls who bought on the way down at perceived ‘value’ levels (valuation, schmaluation!) almost instantly saw their positions turn into losers, and as the downtrend continues it provides additional pain for them. Once a relief rally or even just a bounce begins, they are tempted to sell into the strength just to alleviate their pain and take smaller losses than what they had been facing. This essentially caps the upside of the market, and is why upside has been so limited the past couple of months.
Broken rising trend lines are significant technical events, and it’s wise to take notice whenever you see that happen. The RUT is a perfect example, as this small cap index had been leading the way during the spring making all-time highs in the process until the rising trend line was broken in May. That was a technical sell signal, and I pointed this out in The Bandit Broadcast stock newsletter when it occurred. The broken rising trend line didn’t so much start a bear market as it did end the bull run, so that was certainly a time to lighten up on long positions and start considering some short sales. It’s funny how few short candidates showed up on my screens prior to that event and how many there have been since then. That event shifted my trading bias significantly, so I’m fortunate to have placed such high importance on that trend line break. Here’s a chart with a look at the broken trend line:
(Click image for full size) Once the rising trend line was broken, the RUT headed south in a hurry. Many traders lack discipline. This is not a new lesson, but I’ve recently been reminded of it. I have seen several people walk away from trading in recent weeks just because they’ve sustained losses in stocks which they refused to exit, hoping for a rebound that never came. HOPE is a 4-letter word! HOPE is not a trading strategy. If you find yourself hoping, you are wrong with at least your timing, and you’re most likely trading bigger than you should be. One other note on discipline I made to subscribers back in May is that once an uptrend ends and things begin to sour, your only logical choices are to go neutral (sit in cash) or get net short. Failing to abide by that basic principle has proved an expensive lesson for some these past two months, whereas the disciplined traders who have embraced that are sitting pretty.
The market won’t rally far without the NAZ. The NAZ has led the way lower, particularly the NAZ 100. In spite of the fact that the DJIA, RUT, and S&P 500 have all held up better than the NAZ, their upside will be limited without it. The NAZ used to be considered just a tech-heavy index that money would flow into and out of depending on the economy and modern advances. I think that now the world has changed and technology is now at the core of our world. Biotechs, semiconductors, and internets are among the most important sectors in our world today, and when those stocks trend down, it significantly handicaps the market. When those three important groups can start acting better, we’ll have much higher odds of a lasting market rally.
This market is acting a little better this week, but it’s still too early to declare that a turnaround has been made. Stay careful out there and keep in mind that even if a tradable low is being created here, it may not be smooth sailing on the way back up. If ever shortened timeframes were a good idea, it’s probably right now.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
[tags]Stocks, Investing, Stock Trading, Technical Analysis, Trading Psychology[/tags]
One Method for Profiting in this Tricky Market
July 25, 2006 at 11:18 am
This market reminds me of a few years ago leading up to March 2003, where every bounce was an invitation to short sell (up until the final low was made). That market provided me with one of my better stretches of consistent profits, ironically with somewhat small position sizes.
Back then, the back-and-forth market action was producing sharp pullbacks and bounces much like what we’re seeing now, and I was trading a very effective method which was low-stress yet highly profitable. Call it the ‘Pick and Grin’ approach.
What I would do was establish small pilot positions (pick) in stocks on reaction bounces anticipating a move back down once the bounce was sold. This method of initiating smaller positions, booking some quick gains, and adding exposure when the stock returned to previous levels was very good to me. If my entry timing was poor, it didn’t matter a lot because I was only in a partial position. Depending on the stock, I’d either add the remaining shares up to my intended size (average down the good way), or cut the trade entirely and look for a better spot to re-enter.
Once the stock began to weaken, I’d place bids to cover at least half of my position, booking profits as the trade developed in my favor. If the move was sharp, I’d take most of it. If the move was slow and steady, I’d scale out on the way down. Then I’d patiently wait for the relief bounce or oversold bounce to arrive so that I could remount the shares that I had covered.
This went on for a few months, and I was amazed to see what my consistent gains were adding up to by the end of the month. Minor gains in a handful of stocks were booked with regularity, and the end result was a fatter trading account.
Right now, this market is making it very difficult to hold positions for very long. The sharp spikes upward we’re seeing are being followed by dizzying spirals right back down, making it much harder to not only locate good swing trading candidates, but also harder to hold them.
Consider the Pick and Grin approach until things smooth out. With the sharp market moves likely to continue for at least a little while, it won’t hurt to trade a little smaller. Plus, the add-and-subtract style of the Pick and Grin approach will let this back-and-forth market play to your advantage.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
