Newsletter

January 6, 2007

Trading With Discipline

Market & Sector Review
Year in Review

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

Trading With Discipline

In my dozen or so years as a stock and commodities broker, I was exposed to many different trading styles as well as trader types. Some were very successful, some only slightly, most however, failed over time. Those that were very successful shared two common traits. First they had a trading plan, that was perhaps revised from time to time, but nevertheless followed religiously; and second they had untiring discipline.

Expert trader John Hayden author of "The 21 Irrefutable Truths of Trading" states: "Without discipline, you will be unable to master your ego, create empowering beliefs, have faith, and develop confidence in your abilities. The lack of discipline will prevent your skill as a trader from progressing."

Making an occasional winning trade, that ignores your trading plan, may provide short-term pleasure, but entering trades unsystematically can adversely influence your ability to maintain discipline over the long term. Why? When you stop following your plan, you are being rewarded for a lack of discipline. You may start believing that abandoning your plan is therefore not a big deal. Then, whether consciously or unconsciously, you'll begin to think: "I was rewarded once; maybe I will be rewarded again. I'll take a chance." Positive outcomes from undisciplined trading are most often short-lived, and the lack of discipline will ultimately produce trading losses.

Who cares if the win is from my plan or not? It's still a win, right! A win that results from following a trading plan reinforces discipline. A win that occurs by chance (deviating from your plan) will increase your bottom line temporarily, but may cause harm to your psyche and be responsible for future unexplained losses. It reinforces undisciplined trading.

Cultivating discipline is essential for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favor. You implement proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. You should trade consistently, following a specific trading plan on each and every trade. This will allow the law of averages to work in your favor. If you follow the plan sometimes and abandon it at other times, you throw off the probabilities, and you are likely to end up losing overall.
Market & Sector Review
Year in Review

2006 was a great year for bullish investors and traders by almost any measure. Most measure their performance based on how they did versus the major averages and here is how they performed for 2006:
  • Dow Jones Industrials.......+16.29%
  • S & P 500........................+13.62%
  • Russell 1000 (Large Cap)...+13.34%
  • Russell 2000 (Small Cap)...+17.00%
  • Russell 3000....................+13.66%
  • NASDAQ Composite...........+ 9.52%
  • NASDAQ 100....................+ 6.79%
  • NYSE .............................+17.86%
While most of the above indices made the majority of their move from the June/July of 2006 lows, there are notable exceptions. The Russell 2000 which represents the small-cap segment of the U.S. equity universe made the majority of its move from January through May, corrected about 14%, and has only recently slightly exceeded that May 2006 high. The same is true for other small cap and mid cap indices such as; S&P small-cap 600 and S&P mid-cap 400. This action is very much in-line with the November 11, 2006 newsletter pointing to the relative out performance by large cap stocks as a result of the U.S. election where Democrats gained control of both houses of government creating a potential gridlock political environment.

What however might you have achieved if you followed U.S. sectors instead of the major averages everyone else follows, what might you have attained? As of the end of 2006 here is the performance of the top 10 sectors (of 31):

Take particular note of the simple fact each of these sectors outperformed every index listed above. In fact this is the 5th consecutive year of out performance by the number 1 sector, Metals and Mining. I'm quite sure most are assuming the out performance in Metals and Mining was the result of movements in precious metals? But was that the case?

If you assumed gold was the performer responsible for this sectors movement, think again. Gold mining although up better than any major market average listed above, was actually the worst performing industry group within this sector, hmm. Let's quickly look at the best performing industry group within the best performing sector: Steel and Iron.

There are 43 stocks within the Steel & Iron industry group: of those 43 only seven (16%) declined for the year; three (7%) were unchanged for the year; six (14%) advanced but less than the DOW Jones industrials. However, twenty seven (63%) advanced more than the market averages above, sixteen (37%) advanced more than the group average of 60%, and ten (23%) more than doubled in 2006. Which sectors and industry groups will be the Steel and Iron of 2007?

When following U.S. markets ask not how the DOW Jones performed today or over the last week or month, ask instead how the various sectors and industry groups performed.

I'm quite sure many of you have heard about the performance of other markets versus that of the U.S. markets. A great way to follow international and emerging markets is with Exchange Traded Funds (ETFs). Our new ETF section [preview now available in members area] will be making its full debut very soon. This section will be a great way to follow, to analyze, and to invest/trade in these baskets which include international, emerging markets, commodities and more. A great addition to individual stock selection in the U.S. stock market.

Again all 45 of the above international and emerging market Exchange Traded Funds outperformed the best performing indices listed at the top of this newsletter. Chart and follow only the DOW Jones, S&P 500, or NASDAQ composite? Not I!

Summing up, the markets had a great year. What I am attempting to point out here is what was possible if you invest/trade in the right sectors here and abroad. How many years do the major averages have like 2006?

Regardless of what the major averages accomplish in 2007, up 20% or down 20%, there is an old trader cliché "There is always a bull market somewhere". Our job is to find it!
Largest Changes In Raw Numbers (21 Days)
Now includes expanded 300 + ETF's

This Week's Economic Reports

Wishing All a Great 2007!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.