Newsletter
September 17, 2005
Sticking To Your Plan
Market & Sector Review
This Week's Economic Reports
Sticking To Your Plan
New traders often say they have difficulty sticking with their trading plan. There are many possible reasons. A common issue is not having a clearly defined plan. When a trading plan is not clearly defined, it becomes hard to follow, easy to abandon. You may be prone to over-thinking your plan or you may become easily consumed with self-doubt. When you clearly define a plan, in contrast, you can implement it more automatically. You can enter and exit more effortlessly. Many traders say, however, that even when they painstakingly outline a trading plan, they still have difficulty following it. This may have much more to do with your personality, than your particular plan.
People who are disciplined in everyday life, ironically, tend to have the most trouble sticking with trading plans. Disciplined people are rule followers, and research studies have shown that rule followers prefer certainty. Anyone who has traded the markets for a few months soon realizes that the markets are not certain, and conventional wisdom is not consistently valid. Oddly enough, people who are impulsive in everyday life have less difficulty following a trading plan. They view trading the markets as a "game", they enjoy the risk. They have a natural, carefree attitude when it comes to trading as with the rest of life. They can easily think, "Why not follow a plan? It doesn't matter if it goes awry."
Most traders have trouble approaching trading with a carefree attitude. As an example, you see the price rise initially then it stalls before reaching your objective. You begin to think, "How much longer can it go up? I can't wait. I've got to sell and lock in my profits right now." You start thinking, "Don't be greedy can it be a bad thing to get out early and get a profit?" Now it becomes extremely difficult stay. All of a sudden you have abandoned your plan when economic success depends upon your staying the course. It's simple mathematics. Although there may be several profitable trade setups out there, finding a really good one is relatively rare. You'll see many more setups that don't pan out than actually do. When you hit upon one, you must capitalize on it, and maximize your profits, getting as much out of the trade as possible.
If you are a natural born risk taker, sticking with your plan is less difficult. Risk takers get a rush from the trade and can't wait to see what happens. The psychological rush is more enjoyable, in some ways, than the outcome. But most of us are naturally worried about the outcome and a little cautious voice nags us to get out of a trade before it comes to fruition.
How do you quiet this voice of caution? Not easily that's for sure. I think the best thing you can do is to manage risk. If the outcome of the trade truly doesn't matter, then you won't worry as much and can stick with your trading plan. Winning traders view trading as a game, they think, "I'm just trading for fun." They look at a trade and think, I want to see if it reaches my objective or not. They are a student of the markets. The learning experience is more important than the outcome. Winning traders are not only players of the game, but observers. If you can cultivate such an attitude, you'll be able to follow your trading plan, and silence the voice of self-doubt that often thwarts your trading efforts.
Market & Sector Review
I have always been fascinated by people's reactions to the day-to-day market activities and also their willingness to ignore the simple, and the obvious. Having been there myself, I often wonder what makes a trader so arrogant, that he or she thinks they can short "the top" and more importantly, why do they even try? How many of you remember the bear market of the 1970's? Do you remember the Vietnam War and all its turmoil, the banking crisis, the savings and loan crises, the eminent bankruptcy of New York City, the oil crises, a prime interest rate over 20%. It was obviously the end of western civilization as we knew it, of course this was before internet chat rooms and message boards but nevertheless often discussed at local watering holes. Traders were anxious to short on any rally to DOW 800, that's right 800.
Now we have a new Oil Crises, the destruction of a Major U.S. City and port, interest rates rising, major airlines declaring or about to declare bankruptcy. Yet prices of stocks and commodities in general are not trending down when looking at the intermediate or longer term charts. Realize that all the brain power in the world, is always contemplating all the problems in the world, and all this knowledge ends up in the prices as reflected on the stock and commodity markets around the world. Now look at any chart of any major stock exchange (not sectors) around this world and find one in a bear market, just one, in fact on Friday the London FTSE made a new high for this move. As I have stated many times I am looking for a major top, but it has not completely formed and turned down as yet, Why not wait until the trend is down before putting on short positions if you are a position trader, I state it this way because personally I am a patient position trader not looking to catch every little wiggle in the market. While I personally do not have a problem shorting, I realize that if it's in a bull market I am acting arrogantly and really am attempting to gratify my ego. Yes, I will use very tight controls and often be rewarded with loosing money. Jesse Livermore put it so aptly; "efficient players spend more time waiting and/or watching than performing trades, the other way around will eat you alive!" Regardless of what you read this is still a bull market and will be until it isn't, so we must give the bull the benefit of the doubt, no matter how old he is. One mans perspective anyway!
Why do I bring this up and state it in such a strong way. At this weeks low of approximately 1225 (basis S&P 500) we wer merely 1.6% off recent highs of 1245 made on August 3, about one month ago. Now, courtesy of Mark Young - Equity Guardian Group this chart:
Notice the shift amongst the general public reading about all the bad news and turning bearish as we are just off recent highs. Maybe its different this time and the general public has caught "the top" but somehow I really doubt it. As that great investor Bernard Baruch put it "I'm happy to let someone else have the first 20% of a move and another the last 20% of a move, and myself I'm extremely happy with the middle 60%".
Last week I quoted CBS Market-watch as to Richard Russell's pronouncement of 1250 (S&P) being a significant breakout point and the fact that we were a mere 9 points away. This was widely publicized. I really felt at the time that the breakout was a given and eminent, probably Monday or Tuesday, like I am sure most of you did. Well as of this writing that 9 points is now 12 points and the breakout is still elusive. That does not mean it will not happen, it just hasn't as of yet. I continue to believe this market is in a topping process which simply means that from the long side stock selection is of utmost importance and your risk parameters should be tighter than normal. When you catch a nice move don't try and catch the top but sell pieces into the advance.
As I suspected, when I began publishing the 10-biggest changes in raw data for Relative Strength and PT-Price Percent Oscillator that we might pick up early signs of impending moves seems to be panning out. For the last several weeks the Energy Sector has been displaying relative weakness in Relative Strength and PPO. Notice the term relative, not absolute. This past week I saw an interview with Steve Forbes (Forbes Magazine) on CNBC, and he is of the opinion that within 10 to 12 months Crude Oil will be back at $35 per barrel. I don't know if he is right, I sure hope he is, but it's interesting how our changes report appears to agree with him.
One thing I have noticed in these reports is often the indications are early and sometimes very early but they provide a good basis for building watch lists to follow for good opportunity. Remember Jesse Livermore's comment above about watching and waiting. Let's talk a little this week about strategy. Once we get over the ego attempt to buy exact bottoms and sell exact tops trading becomes a little easier. During June and July the sector that was showing the greatest improvements in both measurements were the metals sectors (Precious and Industrial). After the initial move that brought this sector to the forefront, the movement was basically sideways until the beginning of August when they broke out again, suffered a correction in late August and then began to soar. In fact Bob Pisani of CNBC Friday called the Gold stocks the strongest sector in the market. Interesting! I know, from e-mails received that many of you indeed did do some buying in this sector and this week have received some emails about what to do now? Let's look and talk about it just a bit.
Wow that really sounds bullish doesn't it! I believe it to be possible and even likely however I always sit back and say but what if I'm wrong? So the plan is to take 20% of my current Gold positions (acquired two months ago) and put stops close enough that I am basically begging to be taken out. Why? To put it simply we've had a nice run and I do believe we are going higher. This thesis however is becoming a bit popular at the moment so I'll be a bit conservative and look to book 20% in the profit column, reduce my costs and hope the other 80% goes much higher. Heck maybe they won't even take that 20% who knows. If we do get a decent correction from these somewhat overbought levels, well perhaps I'll buy back that 20%, that I cannot answer right now. This is basically what I wrote in answer to the e-mails received about gold stocks, it's a strategy, not a prediction. Strategy is as important as risk management and stock selection, have one!
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.
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