8 Trading Mistakes You Must Avoid

Mistake8 Trading Mistakes You Must Avoid

This Week’s Trading Lesson
Here is a list of eight mistakes that most of us do as we work our way through the learning process it takes to be a successful stock trader. Avoid these and you will be well on your way.
1. Fail to Limit Losses
I have not yet met someone who is always right in the stock market. That means you and I are going to be wrong some of the time. What is important is what we do when we are wrong. When the stock market shows that your analysis was incorrect, sell! Move on, get out, forget about it. Small losses won’t hurt you, using hope to justify holding a loser will.
2. Averaging Down
Averaging down on a loser is buying more at a lower price, expecting the inevitable bounce that gets you out without a loss. This strategy will actually work a lot of the time, you just keep averaging down until the market reverses. However, when it fails to work, and you keep buying in to a stock’s bungee jump that fails to bounce, you can lose everything. Without capital preservation, you are just a spectator.
3. Buying in to Emotion
It is tempting to buy more of a stock that is moving quickly higher. It is important to remember that when everyone is doing this, investors will inevitably pay too much. A simple rule is to not buy stocks that have run away from their trend line. You can buy stocks that have momentum, just wait for them to pull back to the trend line and buy them on short term weakness. Never chase.
4. Believing in Public Information
The stock market is efficient, it prices in all available information. That means the news release that you are reading has no value. The annual report has no value. So long as the general public has the same information as you, your decisions based on that information will provide random results.
5. Selling on Pull Backs
It is easy to be nervous with our winners because the feeling of having a winner turn in to a loser is not a nice one. So, we tend to sell our winners too early, getting out at the first sign of weakness to lock in the profit and give ourselves the congratulatory “you never go broke making a profit” speech. You have to maximize gains and learn to distinguish between the minor pull backs that are part of long term, money making trends and actual trend reversals. A trade is not successful until you have doubled your risk.
6. Taking Too Much Risk
Emotion is the enemy of the trader. Cold hearted people, or at least those who do not care about the risk of the trade, are the best traders. To make sound decisions, you can not risk more on a trade than you are willing to lose. If you do, you will break your trading discipline and avoid selling losers when you are wrong or sell your winners too early.
7. Going Against the Mood of the Market
It is not easy to paddle a canoe up a river, against the current. It is also not easy making money on a stock when the mood of the market is against you. When considering a stock, I always first assess who is in control of the stock, buyers or sellers. To make money, you either have to trade with the group that is in control or pick the point where control changes from one group to another. Don’t go against the mood of the market.
8. Trade Possibility, not Probability
I remember an advertisement for a lottery, it said, “Think of the Possibilities!.” What if the lottery company suggested we think of the probabilities? We have all heard that we have a better chance of getting struck by lightning than picking the right numbers to win the lottery, but because we think of the possibilities, we continue to buy tickets. A lot of people approach the market the same way. They may look at a stock and describe all of the things that could happen, how the company could find gold on a long shot mining exploration and how the stock could go rocketing higher. However, when you trade against probability, you are on the path to poverty.

 

Which mistakes are you making?
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Source: Stockscores.com Perspectives for the week ending May 7, 2013

Apple & Netflix Case Study: Technicals Lead, Fundamentals Lag

Conclusion: Technicals Lead, Fundamentals Lag.
The following two case studies illustrate a very important point: The market and individual stocks (i.e. technicals) move months BEFORE the fundamentals move (up or down).  The reasons “why” are lengthy and outside the scope of this article. Instead of discussing the “why” we shall focus on the “what.” The reason is simple, we care about intelligently operating with “what is actually happening,” not why people think things are happening.

There are countless examples in history of markets and individual stocks turning months before the fundamentals turn. Every major top or bottom in the stock market happened months before the fundamentals turned.  Moral: The market always knows, ignore the market’s opinion at your own risk.
Apple (AAPL) and Netflix (NFLX) are two examples of the techncials turning months before the fundamentals turn.
Apple- AAPL: 
Apple
 
A. All-time high $705.07 on 9.21.12.
* 3-Months Before Earnings Flatten Out
*6-months BEFORE earnings turn Negative For The 1st Time In 10 years!
B. Breaks 50 DMA Line Almost Never Gets Back Above It
C. Death Cross- 50 DMA line Undercuts 200 DMA Line
D. Enters Bear Market: Defined by A >20% Decline from Recent High
E. Q1 2013 Earnings fall -18% which is the first year-over-year quarterly decline in 10 years.
Moral: The market always knows, ignore the market’s opinion at your own risk.
_________________________________________________________________
NFLX
Netflix– NFLX:
A. All-time high $304.79 July 2011
*6-months before earnings turned negative
B. NFLX Breaks Below 50 DMA line & stays below it for months
C. Death Cross: 50 DMA line Undercuts 200 DMA Line
D. NFLX enters bear market and then plunges 82.6% before bottoming!
E. NFLX Bottoms then jumps back above its 50 DMA line
F. Golden Cross: 50 DMA line crosses above 200 DMA line
G. Earnings Accelerate in Q1 2013 vs Q1 2012 AFTER a 300% rally off the low!
Moral: The market always knows, ignore the market’s opinion at your own risk.
I used the same logic in 2012 when I presented my bullish case on the housing recovery on CNBC’s closing bell which was one of the best calls of 2012:
Watch here.

-Adam Sarhan

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7 Trading/Investing Problems, 7 Solutions

solutionsThis Week’s Trading Lesson
I have often said that making money trading stocks is simple, but not easy. Once you learn basic technical analysis techniques, have good tools to identify opportunities and gain some experience at identifying good trading opportunities, the actual job of picking stocks is relatively straightforward. Where most traders fail is in the application of a methodology. The simple and undeniable fact is that we are all human, and therefore, we are all blessed with emotion. When money is on the line, our emotional attachment to it can take over our decision making process.
With that said, I thought it would be helpful to examine the common problem areas that are a result of mental breakdowns. By examining the emotional conduits to decision making, hopefully I can provide some solutions to correct common trading mistakes.
Trading Problem #1 – No Patience on Entry
Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one.
What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed.
By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost.
What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.
The Solution
The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance.
Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.
Trading Problem #2 – Selling Too Soon
We have all felt the disappointment of not selling a stock at the high. When a stock is marching higher, we set a point where we intend to sell so that we can lock in the gain before it goes down. The problem is that after we sell the stock, it continues to go higher leaving us with an opportunity missed.
Selling too soon is a problem that I continue to wrestle with after 23 years of trading stocks. I want to lock in that good feeling of taking a profit off the table. I want to avoid the negative feeling of watching a good profit get cut in half by a rapid sell off. And so, I break my selling rules and sell the stock in anticipation of weakness, rather than when the market tells me I should.
The result is that profitability over the long term is not maximized. Once in a while, I may get out of a trade at a better price than I would if I followed my rules, but over 10 or more trades, my net profitability is not as good as if I had maintained my selling rules. Keeping in mind that trading stocks is a probability game, it is important to maximize gains on the winners so that the inevitable losers can be overcome.
The Solution
There are few things that can help you avoid falling in to this trap. First, go through a number of past trades and apply your selling rules to see what your net profitability would have been if you have been disciplined, and compare those with what you actually achieved. I did this and it gave me powerful proof that maintaining discipline pays off, and is worth striving for. In fact, when I did this over one particular one week period, the difference amounted to a pretty nice new car! That gave me the leverage on my emotions I need to overcome them.

Second, turn off the profit and loss indicator that most brokerages and trading platforms give you. How much you are up or down is irrelevant to the decision making process. Since we have an emotional attachment to the money, knowing that we are up a certain amount and then seeing that shrink on a normal pull back in a stock leads us to make an emotional decision.
Finally, remember to sell at floors, not ceilings. Do not limit the upside movement of a stock by setting a price target, but instead, limit the downside movement by setting a price floor. Sell a stock when it pulls back to a floor, rather than selling it in anticipation of it reaching a ceiling price.
Trading Problem #3 – Letting Small Losses Turn in to Big Losses
As I just mentioned, trading stocks is a probability game. You will not be right all the time, which means that one of the most important aspects of trading stocks is to never let small losses grow in to big, portfolio debilitating losses. You have to limit losses at a risk level if you are going to be successful over the long run.
Solution
The simplest and I think most effective solution for most people is to set a stop loss point before purchasing a stock, and apply it immediately after purchasing a stock. Use basic chart analysis to determine where the market will have proven your decision to enter a trade wrong, and set your stop just below that. Automated stop losses are best because they do not require you to have the discipline to pull the exit button. Do not change your stop once you are in the trade. Making the stop loss judgment before you enter the trade is best since you will not have an emotional attachment to the stock at that point since you have not put your money on the line yet.
Trading Problem #4 – Trading Low Probability Opportunities
My dad is one of those do it yourself guys who would rather work hard than have someone else do the job for him. As a kid growing up, that meant that I helped build fences, garages, basement developments, pour concrete driveways, do yardwork and generally learn that same ethic to work hard. I am thankful that I have that spirit, but in the early stages of being a trader, it was something that hurt me.
The stock market cannot be made to go your way by hard work. There are times when the market giveth, and there are times when the market taketh away. The legendary Vancouver stock promoter Murray Pezim once said that all abnormal profits in the stock market are just short term loans. His point is that people do not know when to leave the market alone, and when it is time to work hard.
Traders will tend to take low probability trading opportunities at the worst time, because it is during weak market conditions that the market only shows marginal opportunities. By working really hard, traders can find opportunities that are pretty good, but not great. By taking these lower probability trades, the trader sets him or herself up for failure, since their rate of success will not be as good.
The Solution
I have said it many times, when the going gets tough, tough traders get lazy. You must always be picky about the kind of trades you make, particularly when the market is weak. Working hard to find opportunities will not make you more money, working hard at being disciplined will.
Teach yourself to look forward to the slow times. Make a list of things that you are going to do when the market slows down. Plant a tree, play golf, kill the ants that are crawling around your house. Just make the list.
Perhaps most importantly, if you depend on the market for a paycheck, make sure that you bank money when the market is good so that you don’t have to trade when the market slows down. Making a trade because you need to pay some bills is not a good way to trade.
Trading Problem #5 – Overtrading
There are stock traders who make 150 or more trades in a single day. I am not sure they make a lot of money. I firmly believe that you can make more money by making fewer trades because it will make you focus on only the best of opportunities, and play them with a larger amount of capital so the pay off is better. By being patient and disciplined with the really high probability trades, you can maximize profitability.
The Solution
If you are currently making 50 trades a week, tell yourself that next week you will only be allowed to make 10. If you are making 20 a week, promise yourself that you can only make 5. Don’t just tell yourself that you are going to stick to your new rule, write it down!
By setting this limit, you will hopefully change your outlook and try harder to only consider very high probability trades. We want to focus on great trading opportunities, not just those that are good.
Trading Problem #6 – Hesitation
You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher.
A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.
The Solution
This is really just a confidence issue. You are either not confident in your ability to analyze stocks, or you are not confident in the methodology that you are using to pick trades. Therefore, you have to research your method so that you have the confidence that it works. Then, you have to start small, making trades that have a potential loss that you are comfortable with. As you gain confidence in your method and your ability, increase the trade size. With your new found confidence, stand in a crowded room and scream, “I am great!” Well, maybe don’t carry it that far.
Trading Problem #7 – Letting Winners Turn in to Losers
The final trading problem that I want to focus on is allowing winning trades to turn in to losers. Many of us have probably had a time when a trade was making big loot, and we started to count the profits like they were ours before we exited the trade. When the stock started to lose the ground it had gained, we avoided selling because we had built up an emotional attachment to the paper profits we had seen. Instead of selling the stock to lock in some gain, we opted to hold out for the stock to go back to where it used to be, promising to sell when it came back to the point where we felt good about the trade. The stock drifts lower, and eventually the gain turns in to a loss. We ultimately sell it at the bottom, swearing never to do it again. But without some reprogramming, we probably will.
The Solution
Like Kenny Rogers used to sing, “Don’t count your money, when you are sitting at the table, there will be time enough for counting, when the dealing’s done.” Do not calculate your profits before you lock them in. Avoiding the profit watch will help you avoid an emotional attachment to the paper profits, giving you greater clarity to take the exit door when the market tells you it is time to do so.
I hope this outline of mental problems and some solutions helps you become a better trader. The difference between those who succeed in trading and those who fail is not the system they play, but how well they play it. Your mind is a powerful thing, don’t let it beat you in the market.
Source: Stockscores.com Perspectives for the week ending April 1, 2013

Valuable vs Invaluable Information

Info
Conclusion: The Most Valuable Information is Price Action:
In theory, information should make the stock market’s world go round. Information about companies and their ability to make money in the future is what should determine share price. As the market learns of new information, price is adjusted up and down to reflect the value of that information.
This implies that investors should focus their analysis on information so they can predict where share prices should go in the future.
While this makes good sense, I have found it to be extremely rare that investors who use information are able to consistently beat the stock market. With smaller retail investors in particular, the use of information for making investing decisions is more destructive than it is beneficial.
10 Reasons Why Using Invaluable Information May Be Destructive To Your Bottom Line:
1. Information Causes You to Ignore the Market’s Message – when you have an understanding of a company’s story, there is a tendency to fall in love with that story and ignore new information that goes against your outlook for the stock. This leads the committed shareholder to hang on to a losing position, allowing the loser to bog down the performance of the overall portfolio.
2. The Market May Not Be Trading On Fundamentals – in theory, stock price is based on the present value of future earnings expectations. In practice, there are often very non fundamental influences on share price. A large investor that has a liquidity crisis may be forced to unload a large position with little regard for price. Often, the laws of supply and demand affect share price even though theory tells us that they should not have an influence.
3. Your Interpretation May Not Be the Same as The Market’s – Our mood affects how we judge information and the same can be said for the market in general. Your fundamental analysis may be correct in an optimistic environment, but if the market is in a pessimistic mood, the investment can lead to losses. Even the market is wrong, it is right.
4. We Tend to Focus On Information That is Easy to Get – we often looks for the easiest way to achieve a goal. With information, there is a tendency to focus on the information that is front of us. Rather than work to find something to disprove our thesis on a stock, we instead look for information to strengthen our thesis. In doing so, we present our own biased outlook for our investment decisions that can often be very incomplete and wrong.
5. Information is Usually Already Priced In – most investors use publicly available information. That means it is widely known and available to anyone considering the stock. If information is available to a large number of investors then we should expect that the market will have priced that information in to the stock. Therefore, the information has not value to us.
6. Information Usually Comes with a Bias – as a general rule, people do what they are financially motivated to do. If someone is encouraging you to purchase a stock, there is a good chance that they have some financial motivation to do so. Before you trust the information you receive, understand the financial motivation. If you find the reason, you will often usually find that there is a strong bias in the information being provided to you.
7. Trading on Truly Insider Information is Illegal – there are few risk free trades in the stock market, but trading on significant, inside information is one. You stand to make a lot of money buying stock in a company that will be acquired by another at a premium tomorrow. If you have that information and act on it, you are trading on inside information and that can land you in jail.
8. Gathering Good Private Information is Expensive and Time Consuming – there are investors who are able to uncover information that is not priced in to a stock but is not considered inside information. This private information is valuable because it can lead to market beating returns. However, gathering private information typically requires significant resources, knowledge and time. For small investors, it is not feasible to do this kind of work across a broad range of stocks.
9. You May Not Have All of the Information You Need – the market tends to focus on two or three key information points that affect the price investors are willing to pay for it. An investor who does a thorough fundamental analysis of the stock may still have an incomplete understanding of the company’s business. If missing one of the key points, this investor can make a gross error in valuing the stock.
10. There Is No Standard for What Information is Worth – There are many formulas for determining what a company’s share price should. Many fundamental analysts look for stocks to trade at a certain multiple of their earnings with that multiple to be based on growth. However, there are great variations in accounting methods that can have a profound effect on how earnings are reported. More importantly, there is no rule that a company should trade at a certain multiple of earnings, that target multiple is just an opinion.
Bottom line:
Ultimately, I look at the market’s interpretation of all available information when I look at a chart of price and volume. It shows not only every bit of information detail but also what the market thinks of it.
Source: Stockscores.com Perspectives for the week ending April 9, 2013
 

Separate Your Emotions From Your Decisions: Ron Johnson & Jon Corzine Lesson

EmotionsOur longstanding readers and clients know that we are big fans of removing your emotions from the decision making process, in life and in the market. This is yet another lesson of what it is paramount for investors to remain objective, analyze the facts and always listen to what the market is saying (not someone’s opinion). 

Love To Fall in Love:

Humans love to fall in love.  It is very easy for investors to fall in love with an idea or a person. Rational investors know that it is very important to separate your emotions from your decisions (Note: most investors, and people, do not behave rationally).

Learn To See, Don’t Be Blind:

Doing this offers many benefits one of which allows you to remain objective and focus on the facts, not fiction (ex: the hope that one man will save a company even though his strategy for that company has not been tested yet). Another favorable benefit is that it allows you to do date your investments, not marry them. This allows you to sell your investment if it is not acting well(falls x% below your purchase price). The old adage says love is blind. Hopefully, investors can learn to “see” and in the future do not fall in love with an idea or person. This way they can avoid losing all their money in MF Global or over 50% in JCP!

Irrational Behavior:

Just as a quick example to illustrate this point- JCP’s Board choose to bring Ullman back- which makes no sense. There are over 7 billion people in the world, they really could not find a better person? 

10 Important Trading Lessons

10 TopThis Week’s Trading Lesson
I believe that making money in the market requires doing what is hard. Often, when your emotions are telling you to take one course of action, you have to go the other way. Here are 10 hard, but necessary, things to do if you want to beat the stock market.
1. Take losses when you are wrong
No one likes to take a loss but losing is part of making money. You have to recognize that the stock market can not be predicted with 100% certainty and accept that being wrong is ok. When the market proves your decision wrong, take the loss!
2. Let profits run when you are right
Never be satisfied with a trade unless it returns you at least twice what you risked on the trade. Of course, more is better; one trade that returns 10 times your risk will pay for 10 losers. Our natural tendency is to fear letting our winners turn in to losers and so we are quick to sell our winners at the first sign of weakness. But realize that is what most people are thinking which means trends will start with a lot of back and forth moves because many investors lack commitment. It is only after a sustained trend upward that the fear diminishes and the trend really starts to accelerate. That is where investors can make the most money, if they stay in the stock long enough to enjoy it.
3. Buy when there is panic selling
The emphasis here is on panic selling, where the overwhelming pessimism has people accepting prices that make no rational sense. Don’t confuse a bear market with panic selling; weakness is not a reason to buy unless it is motivated by panic. Contrarian investing is only effective when emotion causes stocks to be mispriced and that comes with panic selling.
4. Sell when there is irrational buying
When the mass media is espousing the virtues of an investment, when people who know less than nothing about investing are dumping money in to the market, it is probably time to be a seller. If the upward trend goes from being linear to a curve, watch for signs of weakness as the upward trend is nearing its end. At this point, volume will often be much higher than normal and it will seem as though the stock can do nothing wrong.
5. Judge success in groups
Most of us judge our success one trade at a time. Trading is a probability game; you will not make money all of the time so why beat yourself up over a few losses? The only way to judge success is by the amount of money in your account over a large number of trades. Don’t even judge success by how often you are right, it is only about how much money you make over a large number of trades.
6. Test before you trade
To make money in the market, you need a strategy that has an edge. Don’t make investments on a hunch or what someone else tells you to do. Make investments based on a set of rules that you have tested and proven to be successful. Every great trader has a formula, what is yours?
7. Don’t follow the crowd
Average is what most people are doing; do you want to be average? It is only a small percentage of the population that has most of the money and they are making it from the largest group. If you want the money to flow your way, you have to be ahead of the crowd, do things before it is popular.
8. Avoid the headlines
The mainstream media seems to do their big features at or near market tops. If a media outlet has a large audience then their information is going to be priced in by a large number of people. Always remember that it is only a small number of people who beat the stock market which means if you are doing what the large numbers of people are doing, you are probably on the losing side. Going against the headlines will often be the winning strategy.
9. Don’t find comfort in the news
You buy a stock on a tip, based on a trading strategy or maybe after some in depth research. The stock goes down and the market tells you that you made a decision that was wrong. Rather than take the loss, you dig in to the news and find a reason to hang on. Perhaps it is that there are more results coming or that management has a proven track record. Any bit of fundamental information to justify holding the stock when the market tells you not to will help you avoid that negative feeling of taking a loss. Remember, the market never lies and the collective opinion of investors is based on all the information you are looking at. If what you are using to justify the hold is such good information, why are others selling?
10. Keep it simple
Investors have a tendency to get more sophisticated as they lose money. If there set of rules are not working, they add more rules. However, it is not usually the rules that are the problem; it is the application of the rules. People who make money keep it simple but work very hard at being disciplined and unemotional. Easy to say, hard to do.

 Source: Stockscores.com Perspectives for the week ending March 25, 2013

Know What People Do, Not What they Say They Are Doing

PeopleKnow What People Do, Not What they Say They Are Doing
Source: Stockscores.com Perspectives for the week ending March 20, 2013
This week’s Trading Lesson
Investors have many choices on how to analyze the stock market. Most use some form of fundamental analysis, looking at company information to determine whether the stock’s price is more likely to go higher or lower in the future. This approach makes the most intuitive sense and appeals to our need to make an educated decision. However, it is seriously flawed for most investors.
When considering information about companies, it is not enough to know the news. It is also essential to understand whether that information has already been priced in to the stock. Ultimately, using information is only valuable if the rest of the market is not yet aware of it.
Small investors doing fundamental research are competing against large, institutional investors who have considerable resources, industry knowledge and relationships to uncover hidden value. This is sort of like bringing a knife to a gun fight, although it is probably more accurate to say that you are bringing a stir stick to a nuclear war.
Rather than study fundamentals, I prefer to analyze what the market thinks of the fundamentals. Using price and volume activity, it is possible to understand what investors think about the fundamentals. Since the markets are extremely efficient, they tend to price in information long before it is part of the public base of knowledge. Most importantly, studying a stock’s trading history looks at what all investors are doing with their money, not just what some are saying.
When doing analysis, I begin by collecting information. For me, this means looking at all of the relevant charts and assessing what the message of the market is. In this process, it is important that you avoid biasing the research.
It is a common for people to only look for what they want to see. An investor who is long a number of oil stocks will seek out information that confirms the oil market is going higher. You can be a great reader of charts, but if you don’t look at the right charts, you will get a tainted impression of where a market is headed.
Let’s do this process for analyzing the overall market right now. Here is a list of the ETF charts I focus on:
UUP – US Dollar Index
TLT – 20 Year Treasury Bond
GLD – Gold Trust
OIL – Crude Oil
VXX – Volatility Index Futures
SPY – S&P 500
T.XIU – TSX 60
In each of these charts, I look for a few simple characteristics:
Rising bottoms – the buyers are in control
Falling tops – the sellers are in control
Price volatility – if there is a lot of price volatility, investors are uncertain. If the stock is trading in a narrow range, investors are confident
Price relative to a trend line – price far above an upward trend line indicates buyers are emotional. Closer to the trend line shows investors are rational
Price relative past price ceilings and floors – recent breaks through important areas of support and resistance show a change in the perception of fundamental value
We need to look for these things in the charts and the piece together the puzzle of how different factors work together. Let’s go through the list of ETFs and highlight the characteristics:
UUP – the market has been Bullish on the US Dollar for about six weeks and the trend remains up. The recent volatility here indicates the market is getting more uncertain about whether the strength is justified.
TLT – US Treasuries remain in a downward trend, a positive for the stock market since sellers of Treasuries have a good chance of putting the money to work in the stock market.
GLD – Gold is in a downward trend but was oversold until last week. The precious metal is now bouncing back but this strength is not a change of trend yet, I remain Bearish on Gold.
OIL – Oil is in a sideways trading pattern that oscillates up and down without a sustained trend. That deserves a Neutral rating.
VXX – The VXX represents Fear which continues to be on the decline.
SPY – the S&P 500 is still in an upward trend, the recent weakness is thus far only a pullback in that trend and not a break of the trend.
T.XIU – the TSX has been trending sideways over the last couple of months but is slowly building optimism. A break higher will take the index through resistance and likely indicate a broadening of the rally that has occurred in the Banking and Telecomm stocks.

Gambler or Trader?

Gambler or Trader?
Source: Stockscores.com Perspectives for the week ending January 8, 2013

This week’s Trading Lesson
Many people think that trading the stock market is a form of gambling, making the markets of the world not much more than giant electronic casinos. For many who trade the market, gambling is exactly what they are doing. For others, trading is not gambling and this week I want to outline what makes the difference.
First, let’s define what gambling is. Simply, it is wagering money on a bet that has a negative expected value. That means that a rational person who understands the odds of the bet should expect to get less back than they put in. Yes, a gambler might get lucky and get far more back than the math would predict but placing these bets many times will lead to losses.
To avoid being a gambler, the trader must make trades that have a positive expected value. Let me explain by looking at a well-known casino game, Blackjack.
The object of Blackjack is to amass cards that add up to 21 without going over with the hope that your total is greater than that of the dealer. The player who has a King of Hearts and a 10 has a score of 20 and beats the dealer if she has a pair of nines, adding up to 18. I am sure you already know how the game works and I expect that most of you know that in Blackjack, like any casino game, the odds favor the house. That means that a casino that deals thousands of hands of Blackjack can expect to win. They won’t win every hand, just the majority over a large number of hands.
Therefore, Blackjack is a gamble because the expected value of playing the game is negative. There are, however, ways to take the gamble out of Blackjack, some legal according to the rules of the game and others not.
If the dealer is showing a six and you the player have a six and a five, it is not a gamble to “Double Down” by doubling your bet and only taking one more card. The odds of you winning are in your favor in this scenario because the six that the dealer holds is a bad card and the 11 that you currently have has a good chance of turning in to a 21 if you draw a card that has a value of 10. Doubling down on 11 has a positive expected value as long as the dealer is not showing an Ace.
So, within a gambling game like Blackjack there are scenarios where the odds favor making a bigger bet without breaking the rules. Some Blackjack players have learned how to break the rules of the game and put the odds in their favor, the most common way is to count cards.
A card counter keeps track of the number of face and small number cards that remain in the deck by counting those that have been dealt. When a remaining deck is heavy with high value cards, the odds of the player beating the dealer goes up enough to favor the player, making the game one where the expected value of making a bet is positive. At this point, the game is no longer a gamble because the player should make money, unless they suffer from bad luck. This differs from the gambler who relies on good luck to win.
Let’s bring this concept back to trading. Do you know the expected value of the trades you make in the market? To really understand what your odds of making a profit, and the expected size of that profit, requires establishing a set of rules and testing those rules over a large number of trades so you can determine the expected value of your strategy rules.
You may establish that you want to buy any stock that a PE Ratio of less than 70% of the industry average. Sounds like a good idea, but is it? Only testing that rule over many trading examples and market conditions can really tell you if this simple approach to the market is an effective one.
Strategies do not have to be complicated by they do need to be well tested. If you approach the market without a set of trading rules and an understanding of the expected value of your trading approach, you are a gambler. Yes, you will get lucky and could make great profits. However, in the long run, the profits of the gambling trader are just short term loans.

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The Trader Test

This week’s Trading Lesson
Source: Stockscores.com Perspectives for the week ending January 14, 2013

Here is a test.
If a bat and a ball cost $1.10 together and the bat costs $1 more than the ball, how much is the ball?
Do you have your answer?
If you are like the majority of people, you will say that the ball costs $0.10. That is the wrong answer since that would make the bat cost $1.10 ($1 more than the ball) for total cost of $1.20.
The right answer is that the ball costs $0.05 and the bat $1.05 for a total of $1.10.
The reason most people answer this question wrong is not because they lack the intelligence to get it right. The problem is that we are trained to answer questions quickly and that leads us to be impulsive. Instead of thinking, we get lazy and say the first thing that comes in to our mind.
Many people trade the market the same way.
Particularly when trading a hot and fast moving stock, we are inclined to not think about the trade but instead act impulsively. We fear missing out on the opportunity and will make the trade for the wrong reasons. That is the law of upticks; people lose their ability to think when a stock is moving up quickly.
That is why it is important to right down your trading rules. Traders often scoff at this idea, a simple check list of rules seems childish and unnecessary. Yet, how often have you gone back to look at a losing trade that you did and realized that the trade did not fit your requirements?
Think this approach is only for fast moving day traders? Sadly no, even long term trades, those with lots of time to consider, can succumb to impulsive decision making.
We are emotional beings with an emotional attachment to our money. When considering a trade, it is easy to see what we want to see and act impulsively because it feels good to think about the profit potential. Having that check list of rules is good whether you are making a fast paced day trade or a long term position trade.
Trade Well.
 

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5 Different Types Of Trades

Trade Types
Source: Stockscores.com Perspectives for the week ending February 25, 2013

This week’s Trading Lesson:
Remember, when you see a man at the top of a mountain, he did not fall there.
Achievement requires effort, but there are many paths to the top. In stock trading, our goal is simple; beat the market and make money. There are many ways to do that, as a trader that uses chart analysis as my chosen path to success; there are also a number of methods. Here are my Five Typical Trades, each a strategic method for putting money in your account.

Reversals
The first variety of chart pattern set up is the reversal. This class of strategies look for a shift in control from buyers to sellers, or sellers to buyers. I look for two different things when seeking reversals. The first approach is to find stocks that are in sustained price trends and then break their trend line. This can be the break of an upward trend line, telegraphing a downward move, or a downward trend that is broken as the stock makes a bottom.
The other set up is a shift from rising bottoms to falling tops (a topping pattern) or from falling tops to rising bottoms. This second approach to reversals is more conservative but also more reliable. You will get in later on the reversal but the success rate will be higher.
Generally, I prefer waiting for a move from falling tops to rising bottoms when looking for a bottom but I will short sell a simple trend line break on a strong stock rather than wait for the break down from a falling top.
Breaks
There are a lot of stocks that trade in boring, sideways trading ranges that show little price volatility. These stocks are marking time, investors having little new fundamental information to motivate strong buying or selling and a upward or downward trend. Stocks in these situations are opportunities waiting to happen, for abnormal price breakouts with abnormal volume signal that well informed investors have found a fundamental reason to buy or sell the stock aggressively. Since the spread of information in the market is not always fair, these well informed investors are leading the crowd. When the wider market learns of the information that caused the breakout, the stock will be accumulated by many, initiating a money making trend.
But buying breakouts alone is not effective. You have to be sure that the break is a signal that there is something going on with the company, that there is a significant change in company fundamentals behind the break. Understanding chart patterns is key to doing this.
Run Aways
Once a stock gathers momentum and starts moving up, the emotion of the market may cause it to move too quickly. A stock that goes up or down too fast has a greater potential for a short counter trend, caused by investors who take profits. If you bought a stock and make a very good return in a short amount of time, you will likely want to exit the trade to lock in profits.
One trading strategy is to play this process, shorting a stock that goes up too quickly or buying a stock that goes down too fast. This trade goes against the longer term momentum of the stock and is only a short term trade. For savvy swing traders, it can be a lucrative move.
Where do you choose to go against the grain? Look for stocks that are trading with emotion, high volume and a very steep trend. Recognize that these stocks will find barriers at historical support and resistance and will like begin their counter trends there. Anticipate a counter move at these price levels.
Pull Backs
Stocks have momentum once a stock has been in a trend for a while, and that momentum will dominate to bring the stock back on course when there is a short counter trend. Pull Back strategies look for stocks that have a long term trend in one direction and a short term trend in the opposite direction. Playing Pull Backs require you enter the trade when the stock pulls back to the trend line and give some sort of confirmation that it is likely to bounce off of the trend line and continue with the longer term momentum.
Anticipations
Some chart patterns show a mood but lack a trend. For example, those familiar with charts will know that ascending triangles show optimism, and descending triangles pessimism. However, they are consolidation patterns, which means price in general is going sideways over time.
One strategy is to anticipate a breakout by buying stocks in ascending triangles or shorting stocks in descending triangles. Since price volatility is low, the risk of the trade is less and the upside greater if the stock does what we expect of stocks in these patterns, breakout. This is for advanced traders.
 

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