Become A Highly Motivated Trader Market & Sector Review
This Week's Economic Reports
MEMBER UPDATE: Some small improvements have begun this week. Now all Hot Market Scans contain the Industry Group that each stock belongs, along with links at the top of each scan to the current Groups Report as well as the search for stocks within a groups page, so you can easily compare the current stock of interest to others within its respective group. In addition, on the search within groups page there is now an alphabetic display of all the group names and their corresponding numbers to make your research just a little bit easier.
Become A Highly Motivated Trader
Are you a novice trader who is deeply frustrated and ready to give up? You've read many of the trading books, followed all the trading "gurus," and worked tirelessly. Yet, despite all your efforts, your account is lagging badly. Save heart, your experience is common. When you start out, new traders are extremely excited. They dream of success and the recognition that huge profits will bring. Some indeed achieve early success, but many soon discover that achieving success consistently can be elusive. Many people are drawn to trading, but few can trade profitability. The winning trader is a special breed, a person who is highly motivated, but at the same time is realistic and able to persist in the face of adversity, this describes, I am quit sure, most all of this newsletters subscribers!
It's easy to get yourself "psyched up" when you first start out: You merely convince yourself, "All I have to do is apply myself and I'll achieve high profitability." This is a good positive attitude, but the "power of positive thinking" doesn't usually go very far in terms of achieving trading success. It makes you feel good, but then you find that hard work and persistence doesn't necessarily pay off. You need sound trading strategies you need to expose yourself to a variety of market conditions, and must hone your trading skills. Successful trading requires talent, and there's no way to develop one's talents without extensive practice. Just think of your favorite sports hero, how often and for how long have they trained and practiced to develop their talent?
While a positive attitude is very good, a healthy skepticism is paramount. When it comes to trading, you can't believe anything your read or hear. The only time you actually know that you've stumbled upon a profitable trading strategy is when it, indeed, produces a profit. Just convincing yourself you can master the markets with sheer determination and willpower will not get you very far. You must accept the fact that, in the end, trading is like a game, a game of probabilities. Obviously you must take it seriously on one hand, but you must also learn to enjoy the process. Experienced traders take the game seriously, they acknowledge that real money is on the line and it is likely that real losses can wipe out one's account. They address this issue utilizing money and risk management (money management on your total account and risk management on individual trades). No trading strategy is foolproof.
Realize that despite all your efforts, it is quite possible that some unforeseen adverse event can go against your trade, or that current market conditions may just not be conducive to your trading plan. That's where a happy-go-lucky attitude comes in. I believe it's important to view trading like a sport. If you score the winning point, fine. But if you miss it, don't get too bogged down. Just pick yourself up and try again. Eventually, with enough practice and experience, you will move into the realm of the seasoned professional. It is not going to happen over night. It will take time and practice. And that's where the motivation comes in. It is easy to stay motivated for a short time, if you think the payoff will be large and relatively immediate. Trading is a profession where you can go through long periods with little progress. Over the years, a great deal of money will be spent on commissions, losses, apparatus, and instructional materials. The would-be professional trader isn't fazed by it all. He or she views the money spent on trading as similar to what any professional spends on college tuition. He or she believes that eventually, his or her time and effort will pay off. The winning trader is highly motivated.He or she admits that trading is a challenge and that success is far from assured. Despite this harsh reality, the winning trader persists until he or she achieves consistent profitability. Market & Sector Review
This past Wednesday, some friends and I attended opening day of the thoroughbred meet at Saratoga Race Course, an annual trek that has become somewhat of a tradition over the last decade or two. While enjoying some good food and drink, and handicapping the races, it occurred to me just how similar trading stocks is with handicapping horse races. While some or perhaps most of you will be unfamiliar with the racing jargon, I think you will be able to follow the logic through.
Like the stock market, horse racing aficionados use a plethora of methods for picking horses, just as stock market traders use many different methodologies for picking stocks. In a horse race, the first thing I look at is what type of race is this? Is it a claiming race (and if so what is the price), or is it an allowance race, or is it a stakes race? In horse players parlance this is what is known as the class of the race and the horses entered. Translating to the stock market are we in a bull market, a bear market, or a sideways non-trending market. Next I look at the length of the race, is it 6 furlongs (a furlong is 1/8 of a mile), a mile race, or perhaps a mile and a quarter? When you are looking at the market or an individual stock what is your time frame 6 furlongs, a sprint and short term, or is a mile long, intermediate term, or is it a route (a mile and a quarter or more), long term. Some horses race very well in sprints or 6 furlongs and not well at longer distances and vice versa. Some traders operate very well in the short term while others are more interested in the intermediate to longer term. So when looking at what kind of market you are in you must also filter in the distance, or your time frame of operation. If one is bearish and another is bullish they can both be right at the same time depending upon the time frame or distance they are considering.
Now that we know, or I should say think we know, what kind of race or market we are in, the next step is to look at the horses, or in market terminology the sectors, groups, and individual stocks. The first thing I look at is the horse moving up, down, or staying in his/ her class. Many view this movement as potentially both a positive and a negative. Can the horse compete with the better horses if he is moving up in class, or why is the owner moving him down in class is something wrong with the horse or do they just want to win a race and figure they can in the lower class ranking. In stock market parlance is your stock moving up or down in relative strength? If it is moving down is that because it is undergoing a correction or is something wrong? If it is moving up is it because others in its group are moving and it's just following or is it leading those others? Does the company have new management, a new product that is propelling it up and not the others in its group? Think Apple Computer, the I-pod, and the others in its group computer manufacturers.
Now I look at the horses (stocks) history and style. Some horses like to run the race in front, while others like to stalk just off the pace, and still others like to lay back and come on strong late. So it is with stocks, depending on the stage of the business cycle. In a new bull market the leaders will shoot out of the box and lead the rest, others will advance but not as much, just kind of stalking the leaders and awaiting there turn, and many will languish until the bull is well underway and will not reach their peak performance until the market in general is about ready to reverse. Know which stocks you are in, know the horse you are betting.
The final thing I look at, is the horse improving with each race or has his/her performance likely peaked? The purpose of the most improved report in each newsletter is to determine by two different measures which groups are currently improving the most and which look mostly likely to have peaked over the short term. Because the horse I bet has been improving does not mean he will win the race, but I will most likely include him in my exotic wagers. Because a stock or group is improving does not mean it will continue to, but perhaps it is likely to. Unlike stocks though there are no stops in horse racing, in two minutes or less you make money or you lose what you put down. There are obviously a great deal more variables involved than I have discussed here but nevertheless no wonder many good market traders enjoy the sport of kings and handicapping horse races.
Studies of gamblers and speculator's, show that the successful ones, be they horse track handicappers, poker players, or market traders adjust the size of the bet (position size) according to their perception of the odds. When things are inconclusive to you bet zero, when the odds begin to turn in your favor, then you ratchet it up according to the likely outcome.
Now to today's market -> This market keeps on grinding higher and divergences are continuing to develop, if the divergences I see continue to develop this week I will go over several in next weeks letter. In addition to the developing divergences the volume on this rally is severely lacking which I must consider negative. The obvious question, is the impending correction to be just that a small correction within this on going bull market or will the divergences continue to build signaling much more than just a short term correction. It is too early to tell for sure. While I really do not like to call tops I do like to play with different tools in an attempt to look for an impending top area, see if it develops as I anticipate, and then develop a strategy around what I am following. Let's take a look at the S&P 500 weekly chart with some Fibonacci tools and trend lines to see if we can determine where the likely short term top may occur.
First notice the rising wedge formation, a bearish formation, but also look at the declining volume as we rise to and ride along the top of the wedge, this I do not like at all. As most of you know I am a bit of a Fibonacci freak so let's look at some ratios off 3 different legs of this bull market. The first leg we measure is from the October 2002 low though the December 2002 high, 1253 is 261.8% of that leg. Next we measure the leg labeled 2 from March 2003 low through the March 2004 high, 1262 is 127.2% of that leg. And finally let's measure leg labeled 3 from the July 2004 low to the December 31, 2004 high, notice that 1259 is 127.2% of that leg. In other words we have a cluster of Fibonacci resistance points around S&P 1260 and the wedge formation narrowing to zero also around the 1260 level. This is a good point, in my humble opinion to look for a short term top sometime between now and mid-August. The key will obviously be the breaking, if it is to happen, of the rising wedge formation. If I am correct in this assessment we are not very far away both in terms of S&P points or percentage wise so play the long side cautiously here and perhaps look for some good shorts on groups, sectors, and stocks that are weakening during this weak advance. Shorting the indices here or near the 1260 level is for short term well healed traders only, for more conservative traders this is the time to bet zero till the outlook becomes more clear. If you are holding individual stocks the analysis should be on them alone and sales because there is a problem there and not with the S&P, remembering "it is a market of stocks".
This Week's Economic Reports
Have A Great Week!BillDisclaimer: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.
First notice the rising wedge formation, a bearish formation, but also look at the declining volume as we rise to and ride along the top of the wedge, this I do not like at all. As most of you know I am a bit of a Fibonacci freak so let's look at some ratios off 3 different legs of this bull market. The first leg we measure is from the October 2002 low though the December 2002 high, 1253 is 261.8% of that leg. Next we measure the leg labeled 2 from March 2003 low through the March 2004 high, 1262 is 127.2% of that leg. And finally let's measure leg labeled 3 from the July 2004 low to the December 31, 2004 high, notice that 1259 is 127.2% of that leg. In other words we have a cluster of Fibonacci resistance points around S&P 1260 and the wedge formation narrowing to zero also around the 1260 level. This is a good point, in my humble opinion to look for a short term top sometime between now and mid-August. The key will obviously be the breaking, if it is to happen, of the rising wedge formation. If I am correct in this assessment we are not very far away both in terms of S&P points or percentage wise so play the long side cautiously here and perhaps look for some good shorts on groups, sectors, and stocks that are weakening during this weak advance. Shorting the indices here or near the 1260 level is for short term well healed traders only, for more conservative traders this is the time to bet zero till the outlook becomes more clear. If you are holding individual stocks the analysis should be on them alone and sales because there is a problem there and not with the S&P, remembering "it is a market of stocks".
This Week's Economic Reports