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Newsletter August 12, 2006 Psychology of a Trader Market & Sector Review Relative Strength Largest Changes In Raw Numbers (21 Days) This Week's Economic Reports Psychology of a Trader Whenever we talk of personality and character, we are dealing with questions of psychology. You cannot be successful as a trader if you are psychologically unhealthy. Unhealthy people want to duck from reality, and that is not possible in trading - at least not for very long. Successful traders are extremely determined, enormously individual, rarely asking anyone for help or favors. They ask opinions, they read many forecasts and letters dealing with every subject; from technical analysis, fundamental analysis, the economy and economic projections as well as research on individual companies. However, they rarely act on anything but their own decisions. All view profits and losses as their own responsibility, not anyone else's problem. Most professional traders talk mostly about their losses, not their profits. Their tendency is not to brag about their winners, but how they lost. "People not cut out for trading will ask others for opinions, act on that information, and then blame the people giving the advice for the loss. These ineffectual traders never take responsibility for their own decisions, rationalizing away losses or blaming them on bad luck. They are always comparing themselves with others, are envious, do not look to improve through constant study of their mistakes. Indeed, they refuse to accept that they make mistakes at all!" - Victor Sperandeo - Principles of Professional Speculation The thorough understanding of YOU is essential if you wish to be a trader. What you think, what you believe, how you act out your life. These are critical parts of winning not only in trading but also in life itself. Very few people are aware of, or understand the subtlety of knowing yourself, in trading or in any form of speculation. In many careers you can get by without understanding yourself, in trading however you will be quickly eliminated. I believe the real sad part is that people have no idea why they have failed. They most often rationalize they have no luck, when it was not luck at all. It was a lack of understanding themselves and what motivated them to make the decisions they made. The good news is that whatever character or personality traits you feel may be missing, you can acquire. Traders are not born; they develop their traits, personality, and knowledge over time pursuing their passion, their love. They acquire books and periodicals not only on the markets, but the economy and psychology as well. It's not work mind you, it's fun, your passion. Market & Sector Review Relative Strength With stocks, with most things in life, it's always good to know how you stack up against the crowd. If you are a growth investor, your goal is to pick the stocks that are leading the market. Your objective: to beat the major market indices. Looking at a stock, or ETF, or industry group's relative strength is an indispensable tool. Calculating relative strength is nothing more than simple division. The price of your stock (industry group average or ETF) divided by a broad based index (S&P 500, NYSE, NASDAQ Composite etc.). For example; OIH (Oil Services Holders Trust -Monday's 8/7 close) =141.36 divided by NYSE index (Monday close) = 8,238.53; yields the result of .017584. Most software programs multiply the result by 1,000 in order to deal with whole numbers. TC2005, for users of that software, does not do the multiplication by 1000, for analysis purposes it does not matter. The chart below is OIH, Oil Services Holders Trust as of the close on Monday 8/7/06, with the relative strength vs. the NYSE index plotted in the windows below the price chart. The Prudent Trader uses the broad based NYSE index simply because of its very broad nature and inclusion of interest sensitive issues which are an integral part of the total trading spectrum. Other indices are often heavily weighted towards specific sectors, i.e. Energy or Technology. The relative strength line shows you whether the stock is leading or lagging the NYSE index. I have added to the relative strength charts, linear regression lines for 3, 21, 34 and 55 days respectively. This will show you the trend of relative strength over the specified period of time. When viewing the relative strength tables of ETF's, industry groups, indices or comparing stocks within industry groups and indices, the relative strength blinkers will tell you if that specific linear regression line of relative strength (shown on chart above) is rising, a plus sign (+), or declining a minus sign (-). This is updated each evening for all industry groups, ETF's, indices, and individual stocks. An upward-sloping line indicates the stock's price is climbing at a faster pace than the NYSE index, the steeper the slope, the larger the degree of out performance. A downward sloping line, on the other hand, tells you the stock is not keeping pace. Studies of the biggest winning stocks show they led the market before launching their big moves. That is, their relative strength line was already rising. An upward-sloping relative strength line is particularly bullish when a stock is breaking out of a base. In fact, you would like to see the relative strength line hit a new high before the stock itself climbs into record territory. At the very least, you want the relative strength line and stock price to hit new peaks in tandem. The relative strength rankings utilize the same data but in a different manner. The rankings utilize a rate-of-change component applied to the relative strength readings over a period of time. The Prudent Trader utilizes a six month as well as a twelve month rate of change to rank ETF, Industry Groups, and indices. Simply click on the heading, i.e. six month or twelve month to sort and rank by that criteria. The higher the ranking the better that ETF, Industry Group, or Index has performed against the NYSE index over that respective period of time. Keep in mind that it's not only important where an ETF, Index, or Industry Group ranks but whether or not that ranking is improving. Along side each ranking for today; there appears where your selection ranked two weeks ago (10 trading days) and one month ago (21 trading days), is it improving or not? The ranking positions along with the relative strength blinkers should give you an excellent indication and I might add, very quickly; whether the particular issue or group is worth a further look. Staying with our OIH example; here is a chart with relative strength rate-of-change for both six and twelve month period of time beginning in early to mid 2004 prior to its spectacular move. If you were to go back to late 2002 you would have seen a very similar picture when OIH was in the high $40's low $50's. On the above chart the relative strength numbers are multiplied by 1,000 yielding whole numbers unlike the first chart where no such multiplication takes place. If relative strength is improving during a consolidation phase it places the odds even more in your favor that any impending break out will be validated by further increases in price. Relative strength is an extremely important tool, if you're objective is to outperform the major averages. I believe understanding and applying relative strength is essential that long term goal. Is your objective to outperform the averages? Largest Changes In Raw Numbers (21 Days) This Week's Economic Reports Have A Great Week! 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.